second Quarter report - Power Financial€¦ · IGM FINANCIAL INC. PARGESA HOLDING SA POWER FINANCIAL CORPORATION ... The trademarks contained in this report are owned by Power Financial

PR

INT

ED

IN

ca

Na

Da

751 Victoria Square

Montréal, Québec, canada H2Y 2J3

514-286-7430

www.powerfinancial.com

2second Quarter report

FoR THE PERIoD ENDED JuNE 30, 2010

This document is also available on www.sedar.com or on the corporation’s Web site, www.powerfinancial.com

additional printed copies of this document are available from the Secretary, Power Financial corporation 751 Victoria Square, Montréal, Québec, canada H2Y 2J3

or

Suite 2600, Richardson Building, 1 Lombard Place, Winnipeg, Manitoba, canada R3B 0X5

ce document est aussi disponible sur le site www.sedar.com ou sur le site Web de la Société, www.powerfinancial.com

Si vous préférez recevoir ce document en français, veuillez vous adresser au secrétaire, corporation Financière Power 751, square Victoria, Montréal (Québec) canada H2Y 2J3

ou

Bureau 2600, Richardson Building, 1 Lombard Place, Winnipeg (Manitoba) canada R3B 0X5

Corporate InformatIon

STock LISTINgS

Shares of Power Financial corporation are listed on the Toronto Stock Exchange,

under the following listings:

coMMoN SHaRES: PWF

FIRST PREFERRED SHaRES:

Series a: PWF.PR.a

Series c: PWF.PR.D

Series D: PWF.PR.E

Series E: PWF.PR.F

Series F: PWF.PR.g

Series H: PWF.PR.H

Series I: PWF.PR.I

Series J: PWF.PR.J

Series k: PWF.PR.k

Series L: PWF.PR.L

Series M: PWF.PR.M

Series o: PWF.PR.o

Series P: PWF.PR.P

TRaNSFER agENT aND REgISTRaR

computershare Investor Services Inc.

offices in:

Montreal (Qc); Toronto (oN); Winnipeg (MB)

www.computershare.com

SHaREHoLDER SERVIcES

Shareholders with questions relating to the payment of dividends, change of address

and share certificates should contact the Transfer agent:


Shareholder Services

100 university avenue, 9th Floor

Toronto, ontario M5J 2Y1

Telephone: 1-800-564-6253 (toll-free in canada and the u.S.) or 514-982-7555


WEB SITE


TO THE SHAREHOLDERS

Power Financial Corporation’s operating earnings for the six-month period ended

June , were $ million or $. per share, compared with $ million or

$. per share in the corresponding period of . Th is represents an increase

of .% on a per share basis.

Th e increase in operating earnings refl ects primarily the increase in the contribution

from the Corporation’s subsidiaries.

Earnings from other items were $ million or nil per share for the six-month period

ended June , , compared with a charge of $ million or $. per share in

the corresponding period of , and consisted mainly of Power Financial’s share

of non-operating results recorded by Pargesa, as discussed in the Parjointco N.V.

section below.

Net earnings, including other items, for the six-month period ended June , ,

were $ million or $. per share, compared with $ million or $. per

share in .

SECOND QUARTER RESULTS

For the quarter ended June , , operating earnings of the Corporation were

$ million or $. per share, compared with $ million or $. per share in

the second quarter of .

Other items for the second quarter of represented a charge of $ million or

$. per share, compared with earnings of $ million or $. per share for the

same quarter in .

Net earnings for the quarter were $ million or $. per share in , compared

with $ million or $. per share in .

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 1

PFC_QUAT2_ENG01_PFC_2010-08-05_v02.indd c1PFC_QUAT2_ENG01_PFC_2010-08-05_v02.indd c1 8/6/10 8:17:29 AM8/6/10 8:17:29 AM

RESULTS OF SUBSIDIARIES AND PARJOINTCO

GREAT-WEST LIFECO INC.

Great-West Lifeco reported net earnings attributable to common shareholders of

$ million or $. per share for the six-month period ended June , ,

compared with $ million or $. per share in the corresponding period of

, an increase of % on a per share basis. For the three-month period ended

June , , Lifeco reported net earnings attributable to common shareholders of

$ million or $. per share, compared with $ million or $. per share

in the same period in .

For the six months ended June , , the strengthening of the Canadian dollar

against the U.S. dollar, the British pound and the euro had a negative currency

impact of $ million on Lifeco’s net earnings. For the three months ended June ,

, the negative currency impact on net earnings of Lifeco was $ million.

Power Financial’s share of this currency eff ect is $ million or $. per share for

the six-month period ended June , , and $ million or $. per share for

the three-month period ended June , .

Lifeco’s contribution to Power Financial’s operating earnings was $ million for

the six-month period ended June , , compared with $ million for the

corresponding period in . For the three-month period ended June , ,

Lifeco’s contribution to Power Financial’s operating earnings was $ million,

compared with $ million in .

2 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


IGM FINANCIAL INC.

IGM Financial reported net earnings available to common shareholders for the

six months ended June , of $ million or $. per share on a diluted

basis, compared with $ million or $. per share in the same period in ,

an increase of .% on a per share basis.

For the three months ended June , , IGM reported net earnings available

to common shareholders of $ million or $. per share on a diluted basis,

compared with $ million or $. per share in , an increase of .% on

a per share basis.

For the six-month and three-month periods ended June , , IGM contributed

$ million and $ million to Power Financial’s operating earnings, compared

with $ million and $ million in .

PARJOINTCO N.V.

Power Financial holds a % interest in Parjointco N.V., which in turn holds a .%

interest in Pargesa Holding SA. Pargesa reported operating earnings of SF million

in the six-month period ended June , , compared with SF million for the

corresponding period in . For the three-month period ended June , ,

Pargesa’s operating earnings were SF million, compared with SF million in

the corresponding period of . Th e Pargesa results for the second quarter of

included Pargesa’s SF million share of a special one-time dividend paid by

GDF Suez.



Expressed in Canadian dollars, the contribution from this investment at equity

to Power Financial’s operating earnings was $ million for the six-month period

ended June , , compared with $ million for the corresponding period

in . For the second quarter of , the contribution from Pargesa to Power

Financial’s operating earnings was $ million, compared with $ million in the

second quarter of .

Pargesa’s non-operating results were earnings of SF million in the six-month period

ended June , . Th is compared with non-operating charges of SF million

in , which essentially consisted of the charge resulting from the adjustment

of the carrying value of Pernod Ricard and Iberdrola recorded in the fi rst quarter

of . As a result, net earnings reported by Pargesa were SF million in the

six-month period ended June , , compared with SF million in the same

period of . For the second quarter of , Pargesa reported net earnings of

SF million, compared with SF million in the second quarter of .

On behalf of the Board of Directors,

Paul Desmarais, Jr., o.c., o.q. André Desmarais, o.c., o.q. R. Jeff rey Orr

Co-Chairman of the Board Co-Chairman of the Board President and

Chief Executive Offi cer

August ,



Signed, Signed, Signed,

GR

EA

T-WEST LIFEC

O IN

C.

IGM

FINA

NC

IAL IN

C.

PAR

GESA

HO

LDIN

G SA

PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

POWER FINANCIAL CORPORATION

TA B L E O F CO N T EN T S

POWER FINANCIAL CORPOR ATION

PA R T A


PA R T B

IGM FINANCIAL INC.

PA R T C

PARGESA HOLDING SA

PA R T D

This document contains management’s discussion and analysis of operating results of Power Financial Corporation for the three months and six months ended June 30, 2010 and the consolidated fi nancial statements of the Corporation as at and for the three months and six months ended June 30, 2010. This document has been fi led with the securities regulatory authorities in each of the provinces and territories of Canada and mailed to shareholders of the Corporation in accordance with applicable securities laws.



The trademarks contained in this report are owned by Power Financial Corporation or by a member of the Power Financial group of companies. Trademarks that are not owned by Power Financial are used with permission.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPER ATING RESULTS

PA G E A 2

FINANCIAL STATEMENTS AND NOTES

PA G E A 1 9

JUNE 30, 2010


PA RT A

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 A 1

PFC_QUAT2_ENG01_PFC_2010-08-05_v02.indd A1PFC_QUAT2_ENG01_PFC_2010-08-05_v02.indd A1 8/6/10 8:17:30 AM8/6/10 8:17:30 AM

PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

POWER FINANCIAL CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS

OF OPERATING RESULTS AUGUST 6, 2010

ALL TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLLARS UNLESS OTHERWISE NOTED.

The following sets forth management’s discussion and analysis (MD&A) of the interim consolidated financial position and results of operations of Power Financial Corporation (Power Financial or the Corporation) for the six-month and three-month periods ended June 30, 2010 (the interim MD&A). This document should be read in conjunction with the unaudited interim consolidated financial statements of Power Financial and notes thereto for the six-month and three-month periods ended June 30, 2010, management’s discussion and analysis of operating results for the year ended December 31, 2009 (the 2009 MD&A), and the consolidated financial statements and notes thereto for the year ended December 31, 2009 (the 2009 Consolidated Financial Statements). Additional information relating to Power Financial, including its Annual Information Form, may be found on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTS › Certain statements in this MD&A, other than statements of historical fact, are forward-looking statements based on certain assumptions and reflect the Corporation’s and its subsidiaries’ current expectations. Forward-looking statements are provided for the purposes of assisting the reader in understanding the Corporation’s financial position and results of operations as at and for the periods ended on certain dates and to present information about management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes. These statements may include, without limitation, statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the Corporation and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as “expects”, “anticipates”, “plans”, “believes”, “estimates”, “seeks”, “intends”, “targets”, “projects”, “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”.

By its nature, this information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, many of which are beyond the Corporation’s and its subsidiaries’ control, affect the operations, performance and results of the Corporation and its subsidiaries and their businesses, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. These factors include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, management of market liquidity and funding risks, changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates), the effect of applying future accounting changes (including adoption of International Financial Reporting Standards), business competition, operational and reputational risks, technological change, changes in government regulation and legislation, changes in tax laws, unexpected judicial or regulatory proceedings, catastrophic events, the Corporation’s and its subsidiaries’ ability to complete strategic transactions, integrate acquisitions and implement other growth strategies, and the Corporation’s and its subsidiaries’ success in anticipating and managing the foregoing factors. The reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. Information contained in forward-looking statements is based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including management’s perceptions of historical trends, current conditions and expected future developments, as well as other considerations that are believed to be appropriate in the circumstances, including that the foregoing list of factors, collectively, are not expected to have a material impact on the Corporation and its subsidiaries. While the Corporation considers these assumptions to be reasonable based on information currently available to management, they may prove to be incorrect.

Other than as specifically required by law, the Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.

Additional information about the risks and uncertainties of the Corporation’s business is provided in its disclosure materials, including this MD&A and its Annual Information Form, filed with the securities regulatory authorities in Canada, available at www.sedar.com.

A 2 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

OVERVIEW Power Financial, a subsidiary of Power Corporation of Canada, is a holding company with substantial interests in the financial services industry through its controlling interests in Great-West Lifeco Inc. (Lifeco) and IGM Financial Inc. (IGM). Power Financial also holds, together with the Frère group of Belgium, an interest in Pargesa Holding SA (Pargesa).

For a more complete description of the activities and results of Lifeco and IGM, readers are referred to Parts B and C of this MD&A, which consist of their respective interim MD&As and financial statements, as prepared and disclosed by these companies in accordance with applicable securities legislation. This information is also available either directly from SEDAR (www.sedar.com), or from the Web sites of Lifeco (www.greatwestlifeco.com) and IGM (www.igmfinancial.com), respectively. Part D consists of information relating to Pargesa, which is derived from public information issued by Pargesa.

As at June 30, 2010, Power Financial and IGM held 68.4% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65% of the voting rights attached to all outstanding Lifeco voting shares. As at June 30, 2010, Power Financial and The Great-West Life Assurance Company (Great-West Life), a subsidiary of Lifeco, held 56.5% and 3.5%, respectively, of IGM’s common shares.

Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère group each hold a 50% interest in Parjointco N.V. (Parjointco), which, as at June 30, 2010, held a 54.1% equity interest in Pargesa, representing 62.9% of the voting rights of that company. These numbers do not reflect the dilution which could result from the potential conversion of outstanding debentures convertible into new bearer shares issued by Pargesa in 2006 and 2007, as disclosed in the Corporation’s previous MD&As.

The Pargesa group has holdings in major companies based in Europe. These investments are held by Pargesa directly or through its affiliated Belgian holding company, Groupe Bruxelles Lambert (GBL). As at June 30, 2010, Pargesa held a 50.0% equity interest in GBL, representing 52.0% of the voting rights.

As at June 30, 2010, Pargesa’s portfolio was composed of interests in various sectors, including primarily oil, gas and chemicals through Total S.A. (Total); energy and energy services through GDF Suez; water and waste services through Suez Environnement Company (Suez Environnement); industrial minerals through Imerys S.A. (Imerys); cement and building materials through Lafarge S.A. (Lafarge); and wines and spirits through Pernod Ricard S.A. (Pernod Ricard). In addition, Pargesa and GBL have also invested, or committed to invest, in the area of private equity, including in the French private equity funds Sagard 1 and Sagard 2, whose management company is a subsidiary of Power Corporation of Canada.

RECENT DEVELOPMENTS On June 29, 2010, the Corporation issued 11,200,000 4.40% Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P for gross proceeds of $280 million.

On July 30, 2010, the Corporation redeemed all of its $150 million First Preferred Shares, Series J. As previously disclosed, the Corporation also intends to redeem all of its $150 million First Preferred Shares Series C on October 31, 2010. These preferred shares are classified as liabilities in the consolidated balance sheet of the Corporation.

OUTSTANDING NUMBER OF COMMON SHARES As of the date hereof, there were 708,013,680 Common Shares of the Corporation outstanding, compared with 705,726,680 at December 31, 2009. The increase in the number of outstanding Common Shares reflects the exercise of options under the Corporation’s Employee Stock Option Plan. As of the date hereof, options were outstanding to purchase up to an aggregate of 7,800,590 Common Shares of the Corporation under the Corporation’s Employee Stock Option Plan.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES The Consolidated Financial Statements of the Corporation have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP or GAAP herein) and are presented in Canadian dollars.

CHANGES IN ACCOUNTING POLICIES There were no changes in accounting policies adopted by the Corporation in the second quarter of 2010.

INCLUSION OF PARGESA’S RESULTS The investment in Pargesa is accounted for by Power Financial under the equity method. As described above, the Pargesa portfolio currently consists primarily of investments in Imerys, Total, GDF Suez, Suez Environnement, Lafarge and Pernod Ricard, which are held by Pargesa directly or through GBL. Imerys’ results are consolidated in the financial statements of Pargesa, while the contribution from Total, GDF Suez, Suez Environnement and Pernod Ricard to GBL’s operating earnings consists of the dividends received from these companies. GBL accounts for its investment in Lafarge under the equity method, and consequently, the contribution from Lafarge to GBL’s earnings consists of GBL’s share of Lafarge’s net earnings.

The contribution from Pargesa to Power Financial’s earnings is based on the economic (flow-through) presentation of results as published by Pargesa. Pursuant to this presentation, operating income and non-operating income are presented separately by Pargesa. Power Financial’s share of non-operating income of Pargesa, after adjustments or reclassifications if necessary, is included as part of other items in the Corporation’s financial statements.

NON-GAAP FINANCIAL MEASURES In analyzing the financial results of the Corporation and consistent with the presentation in previous years, net earnings are subdivided in the section “Results of Power Financial Corporation” below into the following components: › operating earnings; and › other items, which include the after-tax impact of any item that management considers to be of a non-recurring

nature or that could make the period-over-period comparison of results from operations less meaningful, and also include the Corporation’s share of any such item presented in a comparable manner by Lifeco or IGM. Please also refer to the comments above related to the inclusion of Pargesa’s results.

Management has used these financial measures for many years in its presentation and analysis of the financial performance of Power Financial, and believes that they provide additional meaningful information to readers in their analysis of the results of the Corporation.

Operating earnings and operating earnings per share are non-GAAP financial measures that do not have a standard meaning and may not be comparable to similar measures used by other entities. For a reconciliation of these non-GAAP measures to results reported in accordance with GAAP, see “Results of Power Financial Corporation – Earnings Summary – Condensed Supplementary Statements of Earnings” below.

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES There are no changes to the Corporation’s critical accounting estimates from those reported at December 31, 2009.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

FUTURE ACCOUNTING CHANGES INTERNATIONAL FINANCIAL REPORTING STANDARDS

In February 2008, the CICA announced that Canadian GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. The Corporation will be required to begin reporting under IFRS for the quarter ending March 31, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for the comparative periods presented.

IFRS will require increased financial statement disclosure as compared to Canadian GAAP and the Corporation’s accounting policies will be affected by the change from Canadian GAAP to IFRS, which will impact the presentation of the Corporation’s financial position and results of operations. On adoption of IFRS, the financial position and results of operations reported in accordance with IFRS may differ as compared to Canadian GAAP and these differences may be material. Implementing IFRS will have an impact on accounting, financial reporting and supporting information technology systems and processes. Additionally, the International Accounting Standards Board (IASB) currently has projects underway that are expected to result in new pronouncements and, accordingly, the development of IFRS continues to evolve in Canada.

The Corporation and its subsidiaries have developed IFRS changeover plans which address key areas such as accounting policies, financial reporting, disclosure controls and procedures, information systems, education and training, and other business activities.

Information below regarding the publicly traded subsidiaries’ IFRS changeover plans has been derived from their public disclosure. Readers are referred to Parts B and C of this MD&A.

The Corporation and its subsidiaries are in the process of assessing and preparing to implement changes to accounting policies resulting from the transition to IFRS. The following list, though not exhaustive, identifies changes in key accounting policies which will occur due to the adoption of IFRS. The Corporation and its subsidiaries monitor developments in standards and interpretations of standards and industry practices and may change the accounting policies described in the following paragraphs. › Policyholder and reinsurance contract liabilities will be classified as insurance, investment or service contracts,

as required by IFRS 4, IAS 39 and IAS 18. A review of existing contracts as at December 31, 2009 suggests that a majority of contracts will be classified as insurance contracts, which will continue to be measured using the Canadian Asset Liability Method (CALM) under IFRS. Investment contracts will be accounted for either at fair value or at amortized cost. Reinsurance accounts will be presented on the Consolidated Balance Sheets and in the Consolidated Statements of Earnings on a gross basis.

› Certain deferred acquisition costs and deferred selling commissions may not meet the criteria for deferral and will be expensed as incurred or amortized on a different time period as a result of differences between IFRS and Canadian GAAP. In the case of Lifeco, the balance of deferred acquisition costs which qualifies for deferral will be reclassified from policyholder contract liabilities and presented as an asset in the Consolidated Balance Sheet.

› As discussed in the 2009 MD&A, IGM had been preparing to implement either the current or revised derecognition standard. As the revised standard is now not expected to be issued until after the conversion to IFRS, IGM will be adopting the current standard and will assess the effect of transitioning to the revised standard when it is issued. The IASB currently has an exemption that allows companies converting to IFRS to continue to derecognize assets that would otherwise not meet the criteria for derecognition under IFRS. During the second quarter of 2010, the IASB agreed to replace the fixed date of January 1, 2004 of this exemption with the ‘Date of Transition to IFRS’, which is January 1, 2010 for IGM. This change, if made, could have an effect on IGM’s accounting for its financial assets.

› The assets and liabilities of segregated funds of Lifeco, measured at fair value, will be included within the Corporation’s Consolidated Balance Sheets as a single line (in assets and in liabilities).



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

› Real estate properties will be classified between owner-occupied and investment properties. The classification between the two categories will result in a change in measurement in the value of real estate. At transition, owner-occupied property will be measured at fair value as its deemed cost, while after transition the cost model will be used to value such properties. Investment properties will be measured at fair value at transition and thereafter under IFRS.

› The Corporation is monitoring developments in the IFRS standards relating to employee benefits and is considering its options on transition to IFRS as well as post-conversion at this time.

› The Corporation is assessing its future income tax assets and liabilities in connection with any adjustments arising from the transition to IFRS.

› Adoption of IFRS requires that the IFRS standards be applied on a retroactive basis, with the exception of those permitted under IFRS not to be so applied. Any changes to existing standards must be applied retroactively and reflected in the opening balance sheet at January 1, 2010. There are a number of exemptions from full restatement available under IFRS. While the Corporation continues to evaluate its options on transition, it does expect to elect the one-time option to reset the cumulative translation account to zero upon adoption of IFRS. The Corporation also does not expect to restate prior business combinations due to the complexities involved in obtaining historical valuations and will instead apply the IFRS requirements prospectively.

The Corporation’s IFRS changeover plan includes the modification of financial reporting processes, disclosure controls and procedures, and internal controls over financial reporting, as well as the education of key stakeholders, including the Board of Directors, management and employees. The impact on the Corporation’s information technology, data systems and processes will be dependent upon the magnitude of change resulting from these and other items. At this time, no significant impact on information or data systems has been identified and the Corporation and its subsidiaries do not expect to make changes which will materially affect internal controls over financial reporting.

In November 2009, the IASB issued IFRS 9 to amend the classification and measurement of financial instruments. The standard will be effective for annual periods beginning on or after January 1, 2013. The Corporation is analyzing the impact the new standard will have on its financial assets and liabilities.

The IFRS standard that deals with the measurement of insurance contracts, also referred to as Phase II Insurance Contracts, is currently being developed and a final accounting standard is not expected to be implemented for several years. As a result, Lifeco will continue to measure insurance liabilities using CALM until such time when a new IFRS standard for insurance contract measurement is issued. Consequently, the evolving nature of IFRS will likely result in additional accounting changes, some of which may be significant, in the years following Lifeco’s initial transition to IFRS.

The Corporation has commenced a parallel process to capture IFRS comparative information for fiscal 2010 to quantify the effects of the potential significant differences between IFRS and Canadian GAAP which may be material. As the implications of the conversion are identified, continual requirements for infrastructure, expertise, training and education will continue to be assessed. The Corporation will continue to assess the impact of adopting IFRS, and will update its MD&A disclosures quarterly to report on the progress of its IFRS changeover plan. Parts B and C of this MD&A contain additional detail regarding the adoption of IFRS by Lifeco and IGM, respectively.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

RESULTS OF POWER FINANCIAL CORPORATION This section is an overview of the results of Power Financial. In this section, consistent with past practice, the contributions from Lifeco and IGM, which represent most of the earnings of Power Financial, are accounted for using the equity method in order to facilitate the discussion and analysis. This presentation has no impact on Power Financial’s net earnings and is intended to assist readers in their analysis of the results of the Corporation.

EARNINGS SUMMARY – CONDENSED SUPPLEMENTARY STATEMENTS OF EARNINGS The following tables show a reconciliation of non-GAAP financial measures used herein for the periods indicated, with the reported results in accordance with GAAP for net earnings and earnings per share. June 30, June 30,Six months ended 2010 2009 Per Per Total share Total shareContribution to operating earnings

from subsidiaries and investment at equity Lifeco 601 508 IGM 202 153 Pargesa 54 68

857 729Results from corporate activities (43) (35)Operating earnings [1] [2] 814 1.09 694 0.92Other items [3] 4 (47) (0.06)Net earnings [1] [2] 818 1.09 647 0.86

[1] Operating earnings and net earnings represent earnings before dividends on perpetual preferred shares issued by the Corporation, which amounted to $46 million and $43 million in the six-month periods ended June 30, 2010 and June 30, 2009, respectively.

[2] Operating earnings per share and net earnings per share are calculated after deducting dividends on perpetual preferred shares issued by the Corporation.

[3] See “Other Items” section below for additional information.

June 30, March 31, June 30,Three months ended 2010 2010 2009 Per Per Per Total Share Total Share Total ShareContribution to operating earnings

from subsidiaries and investment at equity Lifeco 297 304 284 IGM 101 101 85 Pargesa 57 (3) 88

455 402 457Results from corporate activities (22) (21) (15)Operating earnings [1] [2] 433 0.58 381 0.51 442 0.60Other items [3] (4) (0.01) 8 0.01 10 0.01Net earnings [1] [2] 429 0.57 389 0.52 452 0.61

[1] Operating earnings and net earnings represent earnings before dividends on perpetual preferred shares issued by the Corporation, which amounted to $23 million, $23 million and $20 million in the three-month periods ended June 30, 2010, March 31, 2010 and June 30, 2009, respectively.

[2] Operating earnings per share and net earnings per share are calculated after deducting dividends on perpetual preferred shares issued by the Corporation.

[3] See “Other Items” section below for additional information.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

OPERATING EARNINGS Operating earnings for the six-month period ended June 30, 2010 were $814 million or $1.09 per share, compared with $694 million or $0.92 per share in the corresponding period in 2009. This represents an increase of 17.9% on a per share basis.

Operating earnings for the three-month period ended June 30, 2010 were $433 million or $0.58 per share, compared with $442 million or $0.60 per share in the corresponding period in 2009 (a decrease of 2.8% on a per share basis) and $381 million or $0.51 per share for the three-month period ended March 31, 2010 (an increase of 14.3% on a per share basis).

For the six months ended June 30, 2010, the strengthening of the Canadian dollar against the U.S. dollar, the British pound and the euro had a negative currency impact on Lifeco’s net earnings of $64 million. For the three months ended June 30, 2010, negative currency impact on net earnings of Lifeco was $33 million. Power Financial’s share of this currency effect is $45 million or $0.06 per share for the six-month period ended June 30, 2010, and $23 million or $0.03 per share for the three-month period ended June 30, 2010.

SHARE OF OPERATING EARNINGS FROM SUBSIDIARIES AND INVESTMENT AT EQUITY Power Financial’s share of operating earnings from its subsidiaries and investment at equity increased by 17.6% in the six-month period ended June 30, 2010, compared with the same period in 2009, from $729 million to $857 million.

Power Financial’s share of operating earnings from its subsidiaries and investment at equity decreased for the three-month period ended June 30, 2010, compared with the same period in 2009, from $457 million to $455 million, a decrease of 0.4%. Compared to the first quarter of 2010, the share of operating earnings from subsidiaries and investment at equity increased by 13.2%, from $402 million to $455 million.

Lifeco’s contribution to Power Financial’s operating earnings was $601 million for the six-month period ended June 30, 2010, compared with $508 million for the corresponding period in 2009. For the three-month period ended June 30, 2010, Lifeco’s contribution to Power Financial’s operating earnings was $297 million, compared with $284 million for the corresponding period in 2009 and $304 million in the first quarter of 2010. Details are as follows: › Lifeco reported net earnings attributable to common shareholders of $874 million or $0.923 per share for the

six-month period ended June 30, 2010, compared with net earnings attributable to common shareholders of $739 million or $0.783 per share in the corresponding period of 2009. This represents an 18% increase on a per share basis. For the three-month period ended June 30, 2010, Lifeco reported net earnings attributable to common shareholders of $433 million or $0.457 per share, compared with net earnings attributable to common shareholders of $413 million or $0.437 per share in the corresponding period of 2009 and $441 million or $0.466 per share in the first quarter of 2010. There were no adjustments to net earnings attributed to common shareholders in 2009 or during the first and second quarters of 2010.

› On a year-to-date basis, higher average equity and bond values resulted in higher average assets under management and higher fee income, as compared to similar periods in 2009.

› As discussed above, the Lifeco results were negatively impacted in 2010 by the strong Canadian dollar in relation to the U.S. dollar, euro and British pound.

IGM’s contribution to Power Financial’s operating earnings was $202 million for the six-month period ended June 30, 2010, compared with $153 million for the corresponding period in 2009. For the three-month period ended June 30, 2010, IGM’s contribution to Power Financial’s operating earnings was $101 million, compared with $85 million for the corresponding period in 2009 and $101 million in the first quarter of 2010. Details are as follows:



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

› IGM reported net earnings available to common shareholders for the six-month period ended June 30, 2010 of $358 million or $1.36 per share on a diluted basis, compared with $278 million or $1.05 per share in the same period in 2009, an increase of 29.5% on a per share basis. For the three-month period ended June 30, 2010, IGM reported net earnings available to its common shareholders of $179 million or $0.68 per share on a diluted basis, compared with net earnings available to common shareholders of $145 million or $0.55 per share in the same period in 2009, an increase of 23.6% on a per share basis, and net earnings available to common shareholders of $179 million or $0.68 per share in the three-month period ended March 31, 2010. There were no adjustments to net earnings in the six-month periods ended June 30, 2010 and June 30, 2009.

› IGM’s quarterly earnings are primarily dependent on the level of mutual fund assets under management. Improving market conditions in 2010 have resulted in increased levels of average assets under management and increased quarterly earnings.

The contribution from Pargesa to Power Financial’s operating earnings was $54 million in the six-month period ended June 30, 2010, compared with $68 million in the corresponding period of 2009. For the three-month period ended June 30, 2010, the contribution was $57 million, compared with $88 million in the corresponding period of 2009 and a charge of $3 million for the three-month period ended March 31, 2010. Details are as follows: › Pargesa’s operating earnings for the six-month period ended June 30, 2010 were SF220 million, compared

with SF243 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, operating earnings were SF228 million, compared with SF312 million in the corresponding period in 2009 and a loss of SF8 million for the first quarter of 2010.

› The results for Pargesa for the six-month period ended June 30, 2010 reflect increased earnings for Imerys, which is consolidated by Pargesa, offset by the fact that GDF Suez had paid, in addition to its normal dividend, a special one-time dividend in the second quarter of 2009, which represented an amount of SF73 million for Pargesa.

› Operating earnings of Pargesa exclude non-recurring earnings of SF8 million for the six-month period ended June 30, 2010, consisting principally of Pargesa’s non-operating earnings (SF23 million) less an impairment charge of SF15 million on GBL’s investment in Iberdrola as a result of a decline in the market value of the investment.

For a more complete discussion of the results of Lifeco and IGM, readers are referred to Parts B and C of this MD&A, which consist of their respective interim MD&As and financial statements, as prepared and disclosed by these companies in accordance with applicable securities legislation. Part D consists of information relating to Pargesa, which is derived from public information issued by Pargesa.

RESULTS FROM CORPORATE ACTIVITIES Results from corporate activities include income from investments, operating expenses, financing charges (which include dividends on the Corporation’s Preferred Shares Series C and J as these are classified as liabilities), depreciation and income taxes. Corporate activities were a net charge of $43 million in the six-month period ended June 30, 2010, compared with a net charge of $35 million in the corresponding period of 2009. For the three-month period ended June 30, 2010, corporate results were a net charge of $22 million, compared with a net charge of $15 million in 2009 and a net charge of $21 million in the first quarter of 2010.

The change in corporate activities largely results from a gain of $4 million recorded in the second quarter of 2009 on the sale of securities and slightly higher operating expenses in the six-month period ended June 30, 2010, when compared to the six-month period ended June 30, 2009.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

OTHER ITEMS For the six-month period ended June 30, 2010, other items represent a positive contribution of $4 million or nil per share, compared with a charge of $47 million or $0.06 per share in the corresponding period of 2009. The following tables provide additional information on other items for the periods indicated: June 30, June 30,Six months ended 2010 2009Lifeco IGM Pargesa

Impairment charge (4) (53)Other 8 (6)

Corporate Dilution gain related to issue of common shares by IGM 12

4 (47)

For the three-month period ended June 30, 2010, other items represent a charge of $4 million or $0.01 per share, compared with earnings of $10 million or $0.01 per share in the corresponding period of 2009 and a positive contribution of $8 million or $0.01 per share in the first quarter of 2010. June 30, March 31, June 30,Three months ended 2010 2010 2009Lifeco IGM Pargesa

Impairment charge (4) Other 8 (2)

Corporate Dilution gain related to issue of common shares by IGM 12

(4) 8 10

NET EARNINGS Net earnings for the six-month period ended June 30, 2010 were $818 million or $1.09 per share, compared with $647 million or $0.86 per share in the corresponding period in 2009. For the three-month period ended June 30, 2010, net earnings were $429 million or $0.57 per share, compared with $452 million or $0.61 per share in the corresponding period in 2009, and $389 million or $0.52 per share for the three-month period ended March 31, 2010.

A 1 0 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES June 30, December 31, June 30, December 31, Condensed Supplementary Balance Sheets 2010 2009 2010 2009

Consolidated basis Equity basis [1]

Assets Cash and cash equivalents [2] 4,799 4,855 1,085 756 Investment at equity 2,086 2,675 12,843 13,306 Other investments 104,996 101,194 Goodwill 8,672 8,655 Intangible assets 4,355 4,366 Other assets 17,997 18,486 89 85

Total 142,905 140,231 14,017 14,147

Liabilities Policy liabilities

Actuarial liabilities 100,072 98,059 Other 4,610 4,592

Other liabilities 9,055 8,485 393 390 Preferred shares of the Corporation [3] 300 300 300 300 Preferred shares of subsidiaries 203 Capital trust securities and debentures 535 540 Debentures and other borrowings 6,107 5,967 250 250 120,679 118,146 943 940 Non-controlling interests 9,152 8,878 Shareholders’ equity Perpetual preferred shares 2,005 1,725 2,005 1,725 Common shareholders’ equity 11,069 11,482 11,069 11,482 13,074 13,207 13,074 13,207 Total 142,905 140,231 14,017 14,147 [1] Condensed supplementary balance sheets of the Corporation using the equity method to account for Lifeco and IGM. [2] Under the equity basis presentation, cash equivalents include $318 million ($273 million at December 31, 2009) of fixed income

securities with maturities of more than 90 days. In the Consolidated Financial Statements, this amount of cash equivalents is classified in investments.

[3] First Preferred Shares, Series C and J (see also section “Recent Developments” above).

CONSOLIDATED BASIS The consolidated balance sheets include Lifeco’s and IGM’s assets and liabilities. Parts B and C of this MD&A relating to these subsidiaries include a presentation of their balance sheets.

Total assets of the Corporation increased to $142.9 billion at June 30, 2010, compared with $140.2 billion at December 31, 2009.

The investment at equity of $2,086 million represents the Corporation’s carrying value in Parjointco. The decrease in the carrying value is mainly due to foreign currency changes and a decrease in the market value of Pargesa’s investments accounted for as available-for-sale assets.

Other investments at June 30, 2010 were $105.0 billion, a $3.8 billion increase from December 31, 2009.

Liabilities increased from $118.1 billion at December 31, 2009 to $120.7 billion at June 30, 2010. Lifeco’s actuarial liabilities increased from $98.1 billion to $100.1 billion over the same period.

Debentures and other borrowings increased by $140 million during the six-month period ended June 30, 2010, while subsidiaries repurchased preferred shares for an amount of $203 million. Details are included in the “Cash Flows – Consolidated” section below.

The increase in perpetual preferred shares presented in the “Shareholders’ Equity” section above results from the issue of the Series P First Preferred Shares for an amount of $280 million during the second quarter of 2010.

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 A 1 1


PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

Non-controlling interests include the Corporation’s non-controlling interests in the common equity of Lifeco and IGM as well as the participating account surplus in Lifeco’s insurance subsidiaries and perpetual preferred shares issued by subsidiaries to third parties.

Assets under administration, which are excluded from the Corporation’s balance sheet, include segregated funds, proprietary mutual funds and institutional net assets of Lifeco, and IGM’s assets under management, at market value, as follows: › For Lifeco, segregated funds, mutual funds, institutional net assets and other assets under administration

decreased from $330.2 billion at December 31, 2009 to $328.9 billion at June 30, 2010. The decrease is mainly due to net asset redemptions.

› IGM’s assets under management, at market value, were $116 billion at June 30, 2010, compared with $121 billion at December 31, 2009. The decrease is principally due to net market depreciation in the latter part of the second quarter of 2010.

EQUITY BASIS Under the equity basis presentation, Lifeco and IGM are accounted for using the equity method. This presentation has no impact on Power Financial’s shareholders’ equity and is intended to assist readers in isolating the contribution of Power Financial, as the parent company, to consolidated assets and liabilities.

Cash and cash equivalents held by Power Financial amounted to $1,085 million at June 30, 2010, compared with $756 million at the end of December 2009. The amount of quarterly dividends declared by the Corporation but not yet paid was $271 million at June 30, 2010. The amount of dividends declared by IGM but not yet received by the Corporation was $76 million at June 30, 2010.

In managing its own cash and cash equivalents, Power Financial may hold cash balances or invest in short-term paper or equivalents, as well as deposits, denominated in foreign currencies and thus be exposed to fluctuations in exchange rates. In order to protect against such fluctuations, Power Financial may, from time to time, enter into currency-hedging transactions with financial institutions with high credit ratings. As at June 30, 2010, essentially all of the $1,085 million of cash and cash equivalents was denominated in Canadian dollars or in foreign currencies with currency hedges in place.

The carrying value at equity of Power Financial’s investments in Lifeco, IGM and Parjointco decreased to $12,843 million at June 30, 2010, compared with $13,306 million at the end of December 2009. This decrease is mainly due to: › Power Financial’s share of net earnings from its subsidiaries and investment at equity for the six-month period

ended June 30, 2010, net of dividends received, amounting to $254 million. › Power Financial’s share of other comprehensive income from its subsidiaries and investment at equity for the

six-month period ended June 30, 2010 in the negative amount of $712 million. This amount includes a net $450 million negative variation in foreign currency translation adjustments, related to the Corporation’s indirect investments in Lifeco’s and Pargesa’s foreign operations, a negative variation in the value of investments classified as available for sale in the amount of $232 million, and a negative variation of $30 million for cash flow hedges.

SHAREHOLDERS’ EQUITY Common shareholders’ equity was $11,069 million at June 30, 2010, compared with $11,482 million at December 31, 2009. The decrease of $413 million is mainly due to: › A $267 million increase in retained earnings, reflecting primarily net earnings of $818 million, less dividends

declared of $541 million. › Changes to accumulated other comprehensive income in the negative amount of $712 million.

Since January 1, 2010, 2,287,000 Common Shares were issued by the Corporation pursuant to the Corporation’s Employee Stock Option Plan for an aggregate amount of $31 million.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

As a result of the above, book value per common share of the Corporation decreased to $15.63 at June 30, 2010, compared with $16.27 at the end of 2009.

As noted in the “Recent Developments” section above, on June 29, 2010 the Corporation issued 11,200,000 4.40% Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P for gross proceeds of $280 million.

The Corporation filed a short-form base shelf prospectus dated November 18, 2008, pursuant to which, for a period of 25 months thereafter, the Corporation may issue up to an aggregate of $1.5 billion of first preferred shares and debt securities, or any combination thereof. This filing provides the Corporation with the flexibility to access debt and equity markets on a timely basis to make changes to the Corporation’s capital structure in response to changes in economic conditions and changes in its financial condition.

CASH FLOWS CASH FLOWS – CONSOLIDATED

Six months ended Three months ended June 30 June 30 2010 2009 2010 2009 Cash flow from operating activities 2,867 2,133 1,549 1,275 Cash flow from financing activities (525) 84 (187) (290)Cash flow from investing activities (2,212) (1,677) (1,616) (552)Effect of changes in exchange rates on cash and cash equivalents (186) 41 50 14 Increase (decrease) in cash and cash equivalents (56) 581 (204) 447 Cash and cash equivalents, beginning of period 4,855 4,689 5,003 4,823 Cash and cash equivalents, end of period 4,799 5,270 4,799 5,270 On a consolidated basis, cash and cash equivalents decreased by $56 million in the six-month period ended June 30, 2010, compared with an increase of $581 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, cash and cash equivalents decreased by $204 million, compared with an increase of $447 million in the corresponding period in 2009.

Operating activities produced a net inflow of $2,867 million in the six-month period ended June 30, 2010, compared with a net inflow of $2,133 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, operating activities produced a net inflow of $1,549 million, compared with a net inflow of $1,275 million in the corresponding period of 2009.

Operating activities during the six-month and three-month periods ended June 30, 2010, compared to the same periods in 2009, included: › For the six-month period ended June 30, 2010, Lifeco’s cash flow from operations was a net inflow of

$2,514 million, compared with a net inflow of $1,822 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, Lifeco’s cash flow from operations was a net inflow of $1,317 million, compared with a net inflow of $1,067 million in the corresponding period of 2009. Cash provided by operating activities is used primarily to pay policy benefits, policyholder dividends and claims, as well as operating expenses and commissions. Cash flows generated by operations are mainly invested to support future liability cash requirements.

› Operating activities of IGM, after payment of commissions, generated $370 million in the six-month period ended June 30, 2010, compared with $344 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, operating activities of IGM, after payment of commissions, generated a net inflow of $206 million, the same as in the corresponding period in 2009.

Cash flows from financing activities resulted in a net outflow of $525 million in the six-month period ended June 30, 2010, compared with a net inflow of $84 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, cash flows from financing activities resulted in a net outflow of $187 million, compared with a net outflow of $290 million in the corresponding period in 2009.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

Financing activities during the six-month and three-month periods ended June 30, 2010 and June 30, 2009, included: For the six-month periods: › Dividends paid by the Corporation and its subsidiaries were $855 million, compared with $837 million in the

corresponding period in 2009. › Issuance of common shares of the Corporation for an amount of $31 million pursuant to the Corporation’s

Employee Stock Option Plan, compared with $10 million in the corresponding period in 2009. › Issuance of common shares by subsidiaries of the Corporation for an amount of $56 million, compared with

$19 million in the corresponding period in 2009. › Repurchases for cancellation by subsidiaries of the Corporation of their common shares amounted to

$52 million, compared with $2 million in the corresponding period in 2009. › Issuance of preferred shares by the Corporation for an amount of $280 million, compared with nil in the

corresponding period in 2009. › Issuance of preferred shares by subsidiaries of the Corporation for an amount of $150 million, compared with

nil in the corresponding period in 2009. › Redemption of preferred shares by subsidiaries of the Corporation for an amount of $200 million, compared

with nil in the corresponding period in 2009. › Issuance of debentures in 2009 by IGM for an amount of $375 million and repayment by IGM of $287 million

of bankers’ acceptances. › Drawdowns by Lifeco on its lines of credit for an amount of $125 million, compared with $182 million in the

corresponding period in 2009. › The sale by IGM of Canada Mortgage Bonds amounting to $618 million under repurchase agreements during

the six-month period ended June 30, 2009.

For the three-month periods:

› Dividends paid by the Corporation and its subsidiaries were $431 million, compared with $422 million in the corresponding period in 2009.

› Issuance of common shares of the Corporation for an amount of $26 million pursuant to the Corporation’s Employee Stock Option Plan, compared with nil in the corresponding period in 2009.

› Issuance of common shares by subsidiaries of the Corporation for an amount of $11 million, compared with $14 million in the corresponding period in 2009.

› Repurchases for cancellation by subsidiaries of the Corporation of their common shares amounted to $30 million, no common shares were repurchased in the corresponding period in 2009.

› Issuance of preferred shares by the Corporation for an amount of $280 million, compared with nil in the corresponding period in 2009.

› Repayment by IGM of $287 million of bankers’ acceptances in 2009. › Drawdowns by Lifeco on its lines of credit in 2009 for an amount of $82 million.

Cash flows from investing activities resulted in a net outflow of $2,212 million in the six-month period ended June 30, 2010, compared with a net outflow of $1,677 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, cash flows from investing activities resulted in a net outflow of $1,616 million, compared with a net outflow of $552 million in the corresponding period in 2009.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

Investing activities during the six-month and three-month periods ended June 30, 2010, compared to the same periods in 2009, included: › Investing activities at Lifeco in the six-month period ended June 30, 2010 resulted in a net outflow of

$2,324 million, compared with a net outflow of $895 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, investing activities at Lifeco resulted in a net outflow of $1,389 million, compared with a net outflow of $451 million in the corresponding period in 2009.

› Investing activities at IGM in the six-month period ended June 30, 2010 resulted in a net inflow of $157 million, compared with a net outflow of $786 million in the corresponding period in 2009. For the three-month period ended June 30, 2010, investing activities at IGM resulted in a net outflow of $60 million, compared with a net outflow of $104 million in the corresponding period in 2009.

Cash flows from activities of Lifeco and IGM are described in their respective MD&As in Parts B and C of this MD&A.

CASH FLOWS – CORPORATE Six months ended Three months ended June 30 June 30 2010 2009 2010 2009 Cash flow from operating activities

Net earnings 818 647 429 452 Earnings from subsidiaries not received in cash (254) (89) (120 ) (150) Other 2 (8) 7 (9)

566 550 316 293 Cash flow from financing activities

Dividends paid on common and preferred shares (540) (535) (270 ) (270) Issuance of perpetual preferred shares 280 280 Issuance of common shares 31 10 26 Share issue expenses (8) (8 )

(237) (525) 28 (270) Cash flow from investing activities 4 4 Increase (decrease) in cash and cash equivalents 329 29 344 27 Cash and cash equivalents, beginning of period 756 607 741 609 Cash and cash equivalents, end of period 1,085 636 1,085 636

Power Financial is a holding company. As such, corporate cash flows from operations, before payment of dividends, are principally made up of dividends received from its subsidiaries and investment at equity and income from investments, less operating expenses, financing charges and income taxes. The ability of Lifeco and IGM, which are also holding companies, to meet their obligations generally and pay dividends depends in particular upon receipt of sufficient funds from their subsidiaries. The payment of interest and dividends by Lifeco’s principal subsidiaries is subject to restrictions set out in relevant insurance and corporate laws and regulations, which require that solvency and capital standards be maintained. As well, the capitalization of Lifeco’s principal subsidiaries takes into account the views expressed by the various credit rating agencies that provide ratings related to financial strength and other measures relating to those companies. The payment of dividends by IGM’s principal subsidiaries is subject to corporate laws and regulations which require that solvency standards be maintained. In addition, certain subsidiaries of IGM must also comply with capital and liquidity requirements established by regulatory authorities.

Dividends declared by Lifeco and IGM in the six-month period ended June 30, 2010 on their common shares amounted to $0.615 and $1.0250 per share, respectively, unchanged from the dividends declared in the corresponding period of 2009.

Pargesa pays its annual dividends in the second quarter. The dividend paid in 2010, which was approved at Pargesa’s annual meeting of shareholders held on May 5, 2010, amounted to SF2.72 per bearer share, an increase of 3.8% when compared to the dividend paid in 2009.

In the six-month period ended June 30, 2010, dividends declared on the Corporation’s Common Shares amounted to $0.70 per share, unchanged from the dividends declared in the corresponding period in 2009.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

RISK FACTORS There are certain risks inherent in an investment in the securities of the Corporation and in the activities of the Corporation, including the following, which investors should carefully consider before investing in securities of the Corporation. This description of risks does not include all possible risks, and there may be other risks of which the Corporation is not currently aware.

Power Financial is a holding company that holds substantial interests in the financial services industry through its controlling interest in each of Lifeco and IGM. As a result, investors in Power Financial are subject to the risks attributable to its subsidiaries, including those that Power Financial has as the principal shareholder of each of Lifeco and IGM. Parts B and C of this MD&A further describe risks related to Lifeco and IGM, respectively.

As a holding company, Power Financial’s ability to pay interest and other operating expenses and dividends, to meet its obligations and to complete current or desirable future enhancement opportunities or acquisitions generally depends upon receipt of sufficient dividends from its principal subsidiaries and other investments and its ability to raise additional capital. The likelihood that shareholders of Power Financial will receive dividends will be dependent upon the operating performance, profitability, financial position and creditworthiness of the principal subsidiaries of Power Financial and on their ability to pay dividends to Power Financial. The payment of interest and dividends by certain of these principal subsidiaries to Power Financial is also subject to restrictions set forth in insurance, securities and corporate laws and regulations which require that solvency and capital standards be maintained by such companies. If required, the ability of Power Financial to arrange additional financing in the future will depend in part upon prevailing market conditions as well as the business performance of Power Financial and its subsidiaries. In recent years, global financial conditions and market events have experienced increased volatility and resulted in tightening of credit that has reduced available liquidity and overall economic activity. There can be no assurance that debt or equity financing will be available, or, together with internally generated funds, will be sufficient to meet or satisfy Power Financial’s objectives or requirements or, if the foregoing are available to Power Financial, that they will be on terms acceptable to Power Financial. The inability of Power Financial to access sufficient capital on acceptable terms could have a material adverse effect on Power Financial’s business, prospects, dividend paying capability and financial condition, and further enhancement opportunities or acquisitions.

The market price for Power Financial’s securities may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond Power Financial’s control. Economic conditions may adversely affect Power Financial, including fluctuations in foreign exchange, inflation and interest rates, as well as monetary policies, business investment and the health of capital markets in Canada, the United States and Europe. In recent years, financial markets have experienced significant price and volume fluctuations that have affected the market prices of equity securities held by the Corporation and its subsidiaries, and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. In periods of increased levels of volatility and related market turmoil, Power Financial’s subsidiaries’ operations could be adversely impacted and the trading price of Power Financial’s securities may be adversely affected.

OFF-BALANCE SHEET ARRANGEMENTS SECURITIZATIONS

IGM’s liquidity management practices include periodic sales of mortgages to securitization trusts sponsored by third parties that in turn issue securities to investors. IGM retains servicing responsibilities and certain elements of recourse with respect to credit losses on transferred loans. During the three-month period ended June 30, 2010, IGM entered into securitization transactions with Canadian bank-sponsored securitization trusts and the Canada Mortgage Bond Program through its mortgage banking operations, with proceeds of $349 million, compared with $399 million in the second quarter of 2009. Securitized loans serviced at June 30, 2010 and December 31, 2009, totalled $3.3 billion. The fair value of IGM’s retained interest was $132 million at June 30, 2010 and $174 million at December 31, 2009.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

GUARANTEES In the normal course of their businesses, the Corporation and its subsidiaries may enter into certain agreements, the nature of which precludes the possibility of making a reasonable estimate of the maximum potential amount the Corporation or subsidiary could be required to pay third parties, as some of these agreements do not specify a maximum amount and the amounts are dependent on the outcome of future contingent events, the nature and likelihood of which cannot be determined.

LETTERS OF CREDIT In the normal course of their reinsurance business, Lifeco’s subsidiaries provide letters of credit (LOC) to other parties or beneficiaries. A beneficiary will typically hold an LOC as collateral in order to secure statutory credit for reserves ceded to or amounts due from Lifeco’s subsidiaries. An LOC may be drawn upon demand. If an amount is drawn on an LOC by a beneficiary, the bank issuing the LOC will make a payment to the beneficiary for the amount drawn, and Lifeco’s subsidiaries will become obligated to repay this amount to the bank.

Lifeco, through certain of its operating subsidiaries, has provided LOC to both external and internal parties, which are described in Note 28 to the Corporation’s 2009 Consolidated Financial Statements.

COMMITMENTS/CONTRACTUAL OBLIGATIONS As at June 30, 2010, there had been no material changes in the contractual obligations of the Corporation and its subsidiaries from those reported in the 2009 MD&A.

FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS In the course of their activities, the Corporation and its subsidiaries use derivative financial instruments. When using such derivatives, they only act as limited end-users and not as market-makers in such derivatives.

The use of derivatives is monitored and reviewed on a regular basis by senior management of the companies. The Corporation and its subsidiaries have each established operating policies and processes relating to the use of derivative financial instruments, which in particular aim at: › prohibiting the use of derivative instruments for speculative purposes; › documenting transactions and ensuring their consistency with risk management policies; › demonstrating the effectiveness of the hedging relationships; and › monitoring the hedging relationship.

There were no major changes to the Corporation’s and its subsidiaries’ policies and procedures with respect to the use of derivative instruments in the second quarter of 2010. In addition, there has not been a significant change in either the notional amount outstanding ($17,734 million at June 30, 2010, compared with $17,393 million at December 31, 2009) or in the exposure to credit risk ($781 million at June 30, 2010, compared with $837 million at December 31, 2009) that represents the market value of those instruments, which are in a gain position. See Note 26 to the Corporation’s 2009 Consolidated Financial Statements for more information on the type of derivative financial instruments used by the Corporation and its subsidiaries. Please also refer to Parts B and C of this MD&A relating to Lifeco and IGM.

INTERNAL CONTROL OVER FINANCIAL REPORTING During the second quarter of 2010, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

SUMMARY OF QUARTERLY RESULTS 2010 2009 2008 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Revenues [1] 7,963 8,874 6,499 10,973 9,777 5,448 7,135 4,623 6,061 18,681 Operating earnings [2] 433 381 384 455 442 252 434 459 590 491

per share – basic 0.58 0.51 0.51 0.61 0.60 0.32 0.59 0.62 0.81 0.67 Other items [3] (4) 8 (44) (3) 10 (57) (1,207) (2) 477 95

per share – basic (0.01) 0.01 (0.06) 0.01 (0.08) (1.71) 0.68 0.13 Net earnings 429 389 340 452 452 195 (773) 457 1,067 586

per share – basic 0.57 0.52 0.45 0.61 0.61 0.24 (1.12) 0.62 1.49 0.80 per share – diluted 0.57 0.52 0.45 0.61 0.61 0.24 (1.12) 0.62 1.48 0.80

Earnings from discontinued operations 472 31 per share – basic 0.67 0.04 per share – diluted 0.67 0.04

Earnings from continuing operations 429 389 340 452 452 195 (773) 457 595 555 per share – basic 0.57 0.52 0.45 0.61 0.61 0.24 (1.12) 0.62 0.82 0.76 per share – diluted 0.57 0.52 0.45 0.61 0.61 0.24 (1.12) 0.62 0.81 0.76

[1] Revenues exclude revenues of Lifeco’s U.S. healthcare business, which was sold on April 1, 2008.

[2] Operating earnings and operating earnings per share are non-GAAP financial measures. Operating earnings include Power Financial’s share of Lifeco’s U.S. healthcare business, which was sold on April 1, 2008. Earnings from continuing operations represent net earnings, excluding Power Financial’s share of Lifeco’s U.S. healthcare business.

For a definition of these non-GAAP financial measures, please refer to “Basis of Presentation and Summary of Accounting Policies – Non-GAAP Financial Measures”, above in this MD&A.

[3] Other items:

2010 2009 2008 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Share of Lifeco’s Impairment charge (983) Restructuring costs (33) Tax valuation allowance (25) Gain on disposal of U.S. healthcare business 472 Gain on reinsurance agreement 128 Reserve strengthening (42)

Share of IGM’s Non-cash charge on available-for-sale securities (38)

Non-cash income tax benefit 10 Premium paid on redemption of preferred shares (8)

Share of Pargesa’s Impairment charges (4) (53) (348) Other 8 (8) (3) (2) (4) (28) (2) 5 9

Corporate Dilution gain 12 97 Provision for dilution losses 113

(4) 8 (44) (3) 10 (57) (1,207) (2) 477 95



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


CONSOLIDATED BALANCE SHEETS

, ,

[in millions of Canadian dollars]

June 30 2010

(unaudited ) December 31

2009 Assets Cash and cash equivalents 4,799 4,855Investments [Note 2] Shares 6,286 6,392 Bonds 71,186 67,388 Mortgages and other loans 17,362 17,356 Loans to policyholders 7,052 6,957 Real estate 3,110 3,101 104,996 101,194Funds held by ceding insurers 10,345 10,839Investment at equity 2,086 2,675Intangible assets 4,355 4,366Goodwill 8,672 8,655Future income taxes 1,256 1,268Other assets 6,396 6,379 142,905 140,231Liabilities Policy liabilities Actuarial liabilities 100,072 98,059 Other 4,610 4,592Deposits and certificates 863 907Funds held under reinsurance contracts 359 186Debentures and other borrowings 6,107 5,967Preferred shares of the Corporation [Note 4] 300 300Preferred shares of subsidiaries [Note 3] – 203Capital trust securities and debentures 535 540Future income taxes 1,301 1,098Other liabilities 6,532 6,294 120,679 118,146 Non-controlling interests 9,152 8,878Shareholders’ Equity Stated capital [Note 4] Perpetual preferred shares 2,005 1,725 Common shares 636 605Contributed surplus 103 102Retained earnings 11,432 11,165Accumulated other comprehensive income (loss) [Note 5] (1,102) (390) 13,074 13,207 142,905 140,231



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

CONSOLIDATED STATEMENTS OF EARNINGS

Three months ended

June 30 Six months ended

June 30 (unaudited) [in millions of Canadian dollars, except per share amounts] 2010 2009 2010 2009Revenues Premium income 4,215 4,664 8,825 9,373 Net investment income Regular net investment income 1,338 1,669 2,777 3,214 Change in fair value on held-for-trading assets 1,101 2,252 2,603 276 2,439 3,921 5,380 3,490 Fee income 1,309 1,192 2,632 2,362 7,963 9,777 16,837 15,225 Expenses Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities 5,622 7,473 12,193 10,839 Commissions 554 528 1,107 1,007 Operating expenses 889 889 1,781 1,801 Financing charges [Note 8] 109 147 213 257 7,174 9,037 15,294 13,904 789 740 1,543 1,321 Share of earnings of investment at equity 57 87 54 67 Other income (charges), net (4) 10 4 (47) Earnings before income taxes and non-controlling interests 842 837 1,601 1,341 Income taxes 171 181 322 311 Non-controlling interests 242 204 461 383 Net earnings 429 452 818 647 Earnings per common share [Note 9]

– Basic 0.57 0.61 1.09 0.86 – Diluted 0.57 0.61 1.09 0.86



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended


June 30 (unaudited) [in millions of Canadian dollars] 2010 2009 2010 2009 Net earnings 429 452 818 647 Other comprehensive income (loss)

Net unrealized gains (losses) on available-for-sale assets Unrealized gains (losses) (113) 243 (147) (253) Income tax on unrealized gains (losses) (24) (41) (40) (11) Reclassification of realized (gains) losses to net earnings 4 (26) (16) (44) Income tax on reclassification of realized (gains) losses to net earnings 1

4

5

7

(132) 180 (198) (301) Net unrealized gains (losses) on cash flow hedges

Unrealized gains (losses) (100) 171 (66) 89 Income tax on unrealized gains (losses) 35 (60) 23 (31) Reclassification of realized (gains) losses to net earnings – (34) – (15) Income tax on reclassification of realized (gains) losses to net earnings –

12

–

5

(65) 89 (43) 48 Net unrealized foreign exchange gains (losses) on translation of foreign operations 108 (369) (511) (201) Other comprehensive income (loss) before non-controlling interests (89) (100) (752) (454) Non-controlling interests (89) 41 40 45 Other comprehensive income (loss) (178) (59) (712) (409) Comprehensive income 251 393 106 238



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30 (unaudited) [in millions of Canadian dollars] 2010 2009 Stated capital – Perpetual preferred shares Perpetual preferred shares, beginning of year 1,725 1,575 Issue of perpetual preferred shares [Note 4] 280 – Perpetual preferred shares, end of period 2,005 1,575 Stated capital – Common shares Common shares, beginning of year 605 595 Issue of common shares under the Corporation’s stock option plan [Note 4] 31 10 Common shares, end of period 636 605 Contributed surplus Contributed surplus, beginning of year 102 91 Stock option expense [Note 4] 4 10 Stock options exercised (3) – Non-controlling interests – (3)Contributed surplus, end of period 103 98 Retained earnings Retained earnings, beginning of year 11,165 10,811 Net earnings 818 647 Dividends to shareholders Perpetual preferred shares (46) (43) Common shares (495) (494)Other (10) – Retained earnings, end of period 11,432 10,921 Accumulated other comprehensive income (loss) [Note 5] Accumulated other comprehensive income (loss), beginning of year (390) 347 Other comprehensive income (loss) (712) (409)Accumulated other comprehensive income (loss), end of period (1,102) (62) Total Shareholders’ Equity 13,074 13,137



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended


June 30 (unaudited) [in millions of Canadian dollars] 2010 2009 2010 2009Operating activities Net earnings 429 452 818 647 Non-cash charges (credits) Change in policy liabilities 1,430 2,817 3,753 1,228 Change in funds held by ceding insurers 212 66 275 210 Change in funds held under reinsurance contracts 13 (3) 166 (11) Amortization and depreciation 24 17 47 49 Future income taxes 122 88 217 87 Non-controlling interests 242 204 461 383 Change in fair value of financial instruments (1,091) (2,221) (2,595) (244) Dilution gain – (12) – (12) Other (453) 551 (277) 281 Change in non-cash working capital 621 (684) 2 (485) 1,549 1,275 2,867 2,133 Financing activities Dividends paid By subsidiaries to non-controlling interests (161) (152) (315) (302) Perpetual preferred shares (23) (23) (46) (41) Common shares (247) (247) (494) (494) (431) (422) (855) (837) Issue of common shares 26 – 31 10 Issue of perpetual preferred shares 280 – 280 – Issue of common shares by subsidiaries 11 14 56 19 Issue of preferred shares by subsidiaries – – 150 – Repurchase of common shares by subsidiaries (30) – (52) (2) Redemption of preferred shares by subsidiaries – – (200) – Issue of debentures and other borrowings 9 457 129 557 Repayment of debentures and other borrowings – (317) (3) (319) Change in obligations related to assets sold under repurchase agreements (5) 26 (5) 618 Deposits and certificates (39) (48) (45) 38 Other (8) – (11) – (187) (290) (525) 84 Investment activities Bond sales and maturities 4,745 5,709 9,559 10,753 Mortgage loan repayments 572 374 966 793 Sales of shares 428 730 1,074 1,388 Real estate sales 9 1 9 8 Proceeds from securitizations 349 399 551 617 Change in loans to policyholders (54) (9) (54) (55) Change in repurchase agreements 104 (257) 325 (73) Acquisition of intangible assets (1) – (8) – Investment in bonds (5,970) (5,877) (11,659) (12,111) Investment in mortgage loans (1,181) (950) (1,678) (1,458) Investment in shares (527) (646) (1,149) (1,446) Investment in real estate (86) (20) (143) (85) Other (4) (6) (5) (8) (1,616) (552) (2,212) (1,677) Effect of changes in exchange rates on cash and cash equivalents 50 14 (186) 41 Increase (decrease) in cash and cash equivalents (204) 447 (56) 581 Cash and cash equivalents, beginning of period 5,003 4,823 4,855 4,689 Cash and cash equivalents, end of period 4,799 5,270 4,799 5,270



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2010

ALL TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLLARS UNLESS OTHERWISE NOTED.

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited consolidated financial statements of Power Financial Corporation (Power Financial or the Corporation) at June 30, 2010 have been prepared in accordance with generally accepted accounting principles in Canada (GAAP). These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2009. These interim unaudited consolidated financial statements do not include all disclosures required for annual financial statements. The interim unaudited consolidated financial statements have been prepared using the same accounting policies described in Note 1 of the Corporation’s consolidated financial statements for the year ended December 31, 2009.

USE OF ESTIMATES AND MEASUREMENT UNCERTAINTY The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes. In particular, the valuation of goodwill and intangible assets, policy liabilities, income taxes, deferred selling commissions, certain financial assets and liabilities, pension plans and other post-retirement benefits are key components of the financial statements requiring management to make estimates. The reported amounts and note disclosures are determined using management’s best estimates based on assumptions that reflect the most probable set of economic conditions and planned courses of action.

The results of the Corporation reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. Financial instrument carrying values currently reflect the illiquidity of the markets and the liquidity premiums embedded in the market pricing methods the Corporation relies upon.

The estimation of policy liabilities relies upon investment credit ratings. Great-West Lifeco Inc.’s (Lifeco) practice is to use third-party independent credit ratings where available. Credit rating changes may lag developments in the current environment. Subsequent credit rating adjustments will impact policy liabilities.

FUTURE ACCOUNTING CHANGES International Financial Reporting Standards The Canadian Accounting Standards Board has announced that Canadian GAAP will be replaced by International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB). Publicly accountable enterprises will be required to adopt IFRS for the fiscal year beginning on or after January 1, 2011. The Corporation will issue its initial interim consolidated financial statements under IFRS, including comparative information, for the quarter ended March 31, 2011.

The Corporation continues to evaluate the financial statement impact of transitioning from Canadian GAAP to IFRS and the related effect on its information systems and processes. Until this effort is complete, the impact of adopting IFRS and the related effects on the Corporation’s consolidated financial statements cannot be fully determined.

The IFRS standard that deals with the measurement of insurance contracts, also referred to as Phase II Insurance Contracts, is currently being developed and a final accounting standard is not expected to be implemented for several years. As a result, Lifeco will continue to measure insurance liabilities using the Canadian Asset Liability Method (CALM) until such time when a new IFRS standard for insurance contract measurement is issued. Consequently, the evolving nature of IFRS will likely result in additional accounting changes, some of which may be significant, in the years following the Corporation’s initial transition to IFRS.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

COMPARATIVE FIGURES Certain of the 2009 amounts presented for comparative purposes have been reclassified to conform to the presentation adopted in the current year.

NOTE 2 INVESTMENTS

June 30, 2010 Market value Amortized cost Total

Available for sale

Held for trading

Loans and receivables

Non-financialinstruments

Carryingvalue

Marketvalue

Shares 1,119 5,167 – – 6,286 6,286Bonds 6,321 55,588 9,277 – 71,186 71,822Mortgages and other loans – 405 16,957 – 17,362 18,162Loans to policyholders – – 7,052 – 7,052 7,052Real estate – – – 3,110 3,110 3,195 7,440 61,160 33,286 3,110 104,996 106,517

December 31, 2009 Market value Amortized cost Total

Available for sale

Held for trading


Non-financialinstruments

Carryingvalue

Marketvalue

Shares 1,464 4,928 – – 6,392 6,392Bonds 4,935 53,288 9,165 – 67,388 67,644Mortgages and other loans – 240 17,116 – 17,356 17,566Loans to policyholders – – 6,957 – 6,957 6,957Real estate – – – 3,101 3,101 3,055 6,399 58,456 33,238 3,101 101,194 101,614

NOTE 3 PREFERRED SHARES OF SUBSIDIARIES

On March 31, 2010, Lifeco redeemed all of its remaining outstanding Series D First Preferred Shares at a redemption price of $25.25 per share. Lifeco had designated outstanding Preferred Shares Series D as held for trading on the consolidated balance sheets with changes in fair value reported in the consolidated statements of earnings. In connection with the transaction, Lifeco recognized a gain of $2 million.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 4 CAPITAL STOCK AND STOCK OPTION PLAN

STATED CAPITAL AUTHORIZED

Unlimited number of first preferred shares, issuable in series, of second preferred shares, issuable in series and of common shares.

ISSUED AND OUTSTANDING June 30, 2010 December 31, 2009

Number of

sharesStated capital

Number of shares

Stated capital

Preferred Shares (classified as liabilities) Series C First Preferred Shares 6,000,000 150 6,000,000 150Series J First Preferred Shares 6,000,000 150 6,000,000 150 300 300

Preferred Shares (perpetual) Series A First Preferred Shares 4,000,000 100 4,000,000 100Series D First Preferred Shares 6,000,000 150 6,000,000 150Series E First Preferred Shares 8,000,000 200 8,000,000 200Series F First Preferred Shares 6,000,000 150 6,000,000 150Series H First Preferred Shares 6,000,000 150 6,000,000 150Series I First Preferred Shares 8,000,000 200 8,000,000 200Series K First Preferred Shares 10,000,000 250 10,000,000 250Series L First Preferred Shares 8,000,000 200 8,000,000 200Series M First Preferred Shares 7,000,000 175 7,000,000 175Series O First Preferred Shares 6,000,000 150 6,000,000 150Series P First Preferred Shares 11,200,000 280 – – 2,005 1,725Common Shares 708,013,680 636 705,726,680 605 In the second quarter of 2010, the Corporation issued 11,200,000 4.40% Non-Cumulative 5-year Rate Reset First Preferred Shares, Series P for cash proceeds of $280 million. The 4.40% Non-Cumulative First Preferred Shares, Series P are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.10 per share per annum. On January 31, 2016 and on January 31 every five years thereafter, the Corporation may redeem for cash the Series P First Preferred Shares in whole or in part, at the Corporation’s option, at $25.00 per share plus all declared and unpaid dividends to the date fixed for redemption or the Series P First Preferred Shares are convertible to Non-Cumulative Floating Rate First Preferred Shares, Series Q, at the option of the holders on January 31, 2016 or on January 31 every five years thereafter. Transaction costs incurred in connection with the Series P First Preferred Shares of $8 million were charged to retained earnings. On July 30, 2010 the Corporation redeemed all its outstanding 4.70% Non-Cumulative, Series J First Preferred Shares.

STOCK-BASED COMPENSATION During the first quarter of 2010, 38,293 options were granted under the Corporation’s Employee Stock Option Plan. No options were granted in the first quarter of 2009 and during the second quarters of 2010 and 2009.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 4 CAPITAL STOCK AND STOCK OPTION PLAN (continued)

The fair value of the options granted in the first quarter of 2010 was estimated using the Black-Scholes option-pricing model with the following assumptions:

2010 Dividend yield 3.9% Expected volatility 20.1% Risk-free interest rate 3.3% Expected life (years) 9 Fair value per stock option ($/option) $4.99 Weighted-average exercise price ($/option) $32.46

Compensation expense relating to stock options granted by the Corporation and its subsidiaries amounted to $3 million in the second quarter of 2010 ($5 million in 2009) and $4 million for the six months ended June 30, 2010 ($10 million in 2009). Options were outstanding at June 30, 2010 to purchase, until March 15, 2020, up to an aggregate of 7,800,590 common shares, at various prices from $16.87 to $37.13 per share. During the six months ended June 30, 2010, 2,287,000 common shares (713,000 in 2009) were issued under the Corporation’s Employee Stock Option Plan for an aggregate consideration of $31 million ($10 million in 2009).

NOTE 5 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Unrealized gains (losses), on

Six months ended June 30, 2010 Available-for-

sale assetsCash flow

hedges

Foreigncurrency

translation Total Balance, beginning of year 834 (36) (1,188) (390) Other comprehensive income (loss) (163) (66) (511) (740) Income taxes (expense) recovery (35) 23 – (12) (198) (43) (511) (752) Non-controlling interests (34) 13 61 40 (232) (30) (450) (712) Balance, end of period 602 (66) (1,638) (1,102) Unrealized gains (losses), on

Six months ended June 30, 2009 Available-for-

sale assetsCash flow

hedges

Foreigncurrency

translation Total Balance, beginning of year 676 (140) (189) 347 Other comprehensive income (loss) (297) 74 (201) (424) Income taxes (expense) recovery (4) (26) – (30) (301) 48 (201) (454) Non-controlling interests 10 (14) 49 45 (291) 34 (152) (409) Balance, end of period 385 (106) (341) (62)



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 6 CAPITAL MANAGEMENT

As an investment holding company, Power Financial’s objectives in managing its capital are:

› To provide sufficient financial flexibility to pursue its growth strategy and support its group companies and other investments.

› To maintain an appropriate credit rating to achieve access to the capital markets at the lowest overall cost of capital.

› To provide attractive long-term returns to shareholders of the Corporation.

The Corporation manages its capital taking into consideration the risk characteristics and liquidity of its holdings. In order to maintain or adjust its capital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new forms of capital. The capital structure of the Corporation consists of preferred shares, debentures and shareholders’ equity composed of stated capital, retained earnings and non-controlling interest in the equity of subsidiaries of the Corporation. The Corporation utilizes perpetual preferred shares as a permanent and cost-effective source of capital. The Corporation considers itself to be a long-term investor and as such holds positions in long-term investments as well as cash and short-term investments for liquidity purposes. As such, the Corporation makes minimal use of leverage at the holding company level. The Corporation is not subject to externally imposed regulatory capital requirements. The Corporation’s major operating subsidiaries are subject to regulatory capital requirements, along with capital standards set by peers or rating agencies. Lifeco’s subsidiaries The Great-West Life Assurance Company (Great-West Life) and Great-West Life & Annuity Insurance Company (GWL&A) are subject to minimum regulatory capital requirements. Lifeco’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate:

› In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). As at June 30, 2010, the MCCSR ratio for Great-West Life was 202%.

› GWL&A is subject to comprehensive state and federal regulation and supervision throughout the United States. The National Association of Insurance Commissioners (NAIC) has adopted risk-based capital rules and other financial ratios for U.S. life insurance companies. At December 31, 2009, the risk-based capital (RBC) ratio for GWL&A was 476% of the Lifeco Action Level.

› As at June 30, 2010 and 2009, Lifeco maintained capital levels above the minimum local requirements in its other foreign operations.

IGM subsidiaries subject to regulatory capital requirements include trust companies, securities dealers and mutual fund dealers. These subsidiaries are in compliance with all regulatory capital requirements.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 7 RISK MANAGEMENT

Power Financial and its subsidiaries have policies relating to the identification, measurement, monitoring, mitigating and controlling of risks associated with financial instruments. The key risks related to financial instruments are liquidity risk, credit risk and market risk (currency, interest rate and equity). The following sections describe how each segment manages these risks.

LIQUIDITY RISK Liquidity risk is the risk that the Corporation and its subsidiaries will not be able to meet all cash outflow obligations as they come due. Power Financial is a holding company. As such, corporate cash flows from operations, before payment of dividends, are principally made up of dividends received from its subsidiaries and investment at equity, and income from investments, less operating expenses, financing charges and income taxes. The ability of Lifeco and IGM, which are also holding companies, to meet their obligations and pay dividends depends in particular upon receipt of sufficient funds from their own subsidiaries. Power Financial seeks to maintain at all times sufficient liquidity to meet all its cash flow requirements. In addition, Power Financial and its parent, Power Corporation of Canada, jointly have a $100 million uncommitted line of credit with a Canadian chartered bank. Power Financial’s significant contractual liquidity requirements were as follows: Less than 1 1–5 After As at June 30, 2010 year years 5 years TotalLong-term debentures – – 250 250Preferred shares classified as liabilities 150 150 – 300 150 150 250 550

For Lifeco, the following policies and procedures are in place to manage liquidity risk:

› Lifeco closely manages operating liquidity through cash flow matching of assets and liabilities, and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets.

› Management of Lifeco closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or the capital markets.

IGM’s liquidity management practices include: controls over liquidity management processes; stress testing of various operating scenarios; and oversight over liquidity management by committees of the board of directors of IGM. For IGM, a key liquidity requirement is the funding of commissions paid on the sale of mutual funds. The payment of commissions continues to be fully funded through ongoing cash flow from operations. IGM also maintains sufficient liquidity to fund and temporarily hold mortgages. Through its mortgage banking operations, residential mortgages are funded through placement with Investors Group’s intermediary operations or through sales to Investors Mortgage and Short Term Income Fund and to third parties, including Canada Mortgage and Housing Corporation (CMHC) or Canadian bank-sponsored securitization trusts, or through private placements to institutional investors. Investors Group is an approved issuer of National Housing Act Mortgage-Backed Securities (NHA MBS) and an approved seller into the Canada Mortgage Bond Program (CMB Program). This issuer and seller status provides Investors Group with additional funding sources for residential mortgages. IGM’s continued ability to fund residential mortgages through Canadian bank-sponsored securitization trusts and NHA MBS is dependent on securitization market conditions that are subject to change. Liquidity requirements for trust subsidiaries which engage in financial intermediary activities are based on policies approved by committees of their respective boards of directors. As at June 30, 2010, the trust subsidiaries’ liquidity was in compliance with these policies. IGM’s contractual obligations have not changed materially since December 31, 2009.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 7 RISK MANAGEMENT (continued)

In addition to IGM’s current balance of cash and cash equivalents, other potential sources of liquidity include IGM’s lines of credit and portfolio of securities. IGM’s operating lines of credit with various Schedule I Canadian chartered banks total $675 million as at June 30, 2010, unchanged from December 31, 2009. The operating lines of credit as at June 30, 2010 consist of committed lines of $500 million and uncommitted lines of $175 million. As at June 30, 2010, IGM was not utilizing its committed lines of credit or its uncommitted lines of credit. Management of IGM believes cash flows from operations, available cash balances and other sources of liquidity described above will be sufficient to fund IGM’s liquidity needs. IGM continues to have the ability to meet its operational cash flow requirements, its contractual obligations and its declared dividends. IGM’s liquidity position and its management of liquidity risk have not changed materially since December 31, 2009.

CREDIT RISK Credit risk is the potential for financial loss to the Corporation and its subsidiaries if a counterparty in a transaction fails to meet its obligations. For Power Financial, cash and cash equivalents and derivatives are subject to credit risk. The Corporation monitors its credit risk management policies continuously to evaluate their effectiveness. Cash and cash equivalents, consisting primarily of highly liquid temporary deposits with Canadian chartered banks as well as bankers’ acceptances and short-term securities guaranteed by the Canadian government, amounted to $764 million. The Corporation regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value. The Corporation mitigates credit risk on these financial instruments by adhering to its Investment Policy, which outlines credit risk parameters and concentration limits. The Corporation regularly reviews the credit ratings of derivative financial instrument counterparties. Derivative contracts are over-the-counter traded with counterparties that are highly rated financial institutions. The exposure to credit risk, which is limited to the fair value of the instruments that are in a gain position, was nil at June 30, 2010. For Lifeco, policies and procedures in place to manage credit risk have not substantially changed since December 31, 2009. Concentration of Credit Risk for Lifeco Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar credit risk characteristics in that they operate in the same geographic region or in similar industries.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


The following table provides details of the carrying value of bonds of Lifeco by industry sector and geographic distribution:

As at June 30, 2010 CanadaUnitedStates Europe Total

Bonds issued or guaranteed by: Canadian federal government 2,890 – 13 2,903 Provincial, state and municipal governments 5,443 1,806 49 7,298 U.S. Treasury and other U.S. agencies 363 2,759 943 4,065 Other foreign governments 133 – 6,272 6,405 Government-related 803 – 1,357 2,160 Sovereign 719 4 666 1,389 Asset-backed securities 2,807 3,572 868 7,247 Residential mortgage-backed securities 47 846 102 995 Banks 2,470 474 2,234 5,178 Other financial institutions 1,089 1,471 1,480 4,040 Basic materials 161 552 211 924 Communications 598 269 502 1,369 Consumer products 1,529 1,573 1,597 4,699 Industrial products/services 567 706 177 1,450 Natural resources 1,075 701 493 2,269 Real estate 591 – 1,378 1,969 Transportation 1,501 591 593 2,685 Utilities 3,202 2,367 2,811 8,380 Miscellaneous 1,666 616 189 2,471Total long-term bonds 27,654 18,307 21,935 67,896Short-term bonds 1,176 683 189 2,048Total bonds 28,830 18,990 22,124 69,944

As at December 31, 2009 CanadaUnitedStates Europe Total

Bonds issued or guaranteed by: Canadian federal government 2,264 1 14 2,279 Provincial, state and municipal governments 4,917 1,333 55 6,305 U.S. Treasury and other U.S. agencies 240 2,620 758 3,618 Other foreign governments 104 – 5,773 5,877 Government-related 778 – 1,372 2,150 Sovereign 783 4 762 1,549 Asset-backed securities 2,636 3,306 851 6,793 Residential mortgage-backed securities 46 842 60 948 Banks 2,201 453 2,299 4,953 Other financial institutions 1,021 1,336 1,507 3,864 Basic materials 151 571 198 920 Communications 598 276 473 1,347 Consumer products 1,384 1,351 1,664 4,399 Industrial products/services 516 651 206 1,373 Natural resources 1,000 710 581 2,291 Real estate 559 – 1,216 1,775 Transportation 1,414 585 594 2,593 Utilities 3,008 2,172 2,702 7,882 Miscellaneous 1,489 562 182 2,233Total long-term bonds 25,109 16,773 21,267 63,149Short-term bonds 2,406 455 137 2,998Total bonds 27,515 17,228 21,404 66,147



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Asset Quality Bond Portfolio Quality

June 30

2010,

December 312009

,

AAA 24,007 21,754AA 11,382 10,585A 20,786 19,332BBB 10,468 10,113BB and lower 1,253 1,365 67,896 63,149Short-term bonds 2,048 2,998Total bonds 69,944 66,147 Derivative Portfolio Quality

June 30

2010,

December 312009

,

Over-the-counter contracts (counterparty ratings): AAA 7 5AA 332 338A 346 374Total 685 717

Loans of Lifeco Past Due, but not Impaired Loans that are past due but not considered impaired are loans for which scheduled payments have not been received, but management of Lifeco has reasonable assurance of collection of the full amount of principal and interest due. The following table provides carrying values of the loans past due, but not impaired:

June 302010

,

December 312009

,

Less than 30 days 4 4530–90 days 12 690 days and greater 1 9Total 17 60

For IGM, cash and cash equivalents, securities holdings, mortgage and investment loan portfolios, and derivatives are subject to credit risk. IGM monitors its credit risk management practices continuously to evaluate their effectiveness. With respect to IGM, at June 30, 2010, cash and cash equivalents of $1.11 billion consisted of cash balances of $79 million on deposit with Canadian chartered banks and cash equivalents of $1.04 billion. Cash equivalents are composed primarily of Government of Canada treasury bills totalling $119 million, provincial government and government-guaranteed commercial paper of $283 million and bankers’ acceptances issued by Canadian chartered banks of $600 million. IGM regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value. IGM mitigates credit risk on these financial instruments by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. Available-for-sale fixed income securities held by IGM at June 30, 2010, are composed of bankers’ acceptances of $68 million, Canadian chartered bank senior deposit notes and floating rate notes of $83 million and $35 million, respectively, government-guaranteed short-term investments of $10 million, and corporate bonds and other of $65 million. The maximum exposure to credit risk on these financial instruments is their carrying value. IGM mitigates credit risk on these financial instruments by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. Held-for-trading fixed income securities are composed of non-bank-sponsored asset-backed commercial paper (ABCP) with a fair value of $28 million, which represents the maximum exposure to credit risk at June 30, 2010.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


IGM regularly reviews the credit quality of the mortgage and investment loan portfolios and the adequacy of the general allowance. As at June 30, 2010, mortgages and investment loans totalled $527 million and $306 million, respectively. The allowance for credit losses of $7 million at June 30, 2010 exceeded impaired mortgages and investment loans by $6 million. As at June 30, 2010, the mortgage portfolios were geographically diverse, 100% residential and 72% insured. The credit risk on the investment loan portfolio is mitigated through the use of collateral, primarily in the form of mutual fund investments. There were no uninsured non-performing loans over 90 days in the mortgage and investment loan portfolios at June 30, 2010, compared to $0.2 million at December 31, 2009. The characteristics of the mortgage and investment loan portfolios have not changed significantly during 2010. IGM’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and mortgage and investment loan portfolios have not changed materially since December 31, 2009. IGM regularly reviews the credit quality of the mortgage loans securitized through CMHC or Canadian bank-sponsored (Schedule I chartered banks) securitization trusts. The maximum exposure to credit risk attributable to securitized mortgage loans is equal to the fair value of the retained interests in the securitized loans, which was $132 million at June 30, 2010, compared to $174 million as at December 31, 2009. Retained interests include:

› Cash reserve accounts and rights to future excess spread – which totalled $104 million at June 30, 2010. The portion of this amount pertaining to Canadian bank-sponsored securitization trusts of $25 million is subordinated to the interests of the trust and represents the maximum exposure to credit risk for any failure of the borrowers to pay when due. Credit risk on these mortgages is mitigated by any insurance on these mortgages, as discussed below, and IGM’s credit risk on insured loans is to the insurer. At June 30, 2010, 95% of the $1.5 billion in outstanding mortgages securitized under these programs were insured.

Rights to future excess spread under the NHA MBS and CMB Program totalled $79 million. Under the NHA MBS and CMB Program, IGM has an obligation to make timely payments to security holders regardless of whether amounts are received by mortgagors. All mortgages securitized under the NHA MBS and CMB Program are insured by CMHC or another approved insurer under the program, and IGM’s credit exposure is to the insurer. Outstanding mortgages securitized under these programs are $1.8 billion.

Since 2008, IGM has purchased portfolio insurance from CMHC on newly funded qualifying conventional mortgage loans. During the third quarter of 2009, IGM expanded its insurance coverage on the $5.6 billion mortgage portfolio which it services related to its mortgage banking operations, including the $3.3 billion securitized portfolio. This coverage provides the same level of credit risk mitigation as insurance on high-ratio loans (non-conventional) at the time of application. At June 30, 2010, 95% of the mortgage portfolio serviced by IGM was insured. Uninsured non-performing loans over 90 days in the securitized portfolio were $0.6 million at June 30, 2010, compared to nil at December 31, 2009. IGM’s expected exposure to credit risk related to cash reserve accounts and rights to future excess spread was not significant at June 30, 2010.

› Fair value of interest rate swaps – which IGM enters into as a requirement of the securitization programs in which it participates and which totalled $29 million at June 30, 2010. The outstanding notional amount of these interest rate swaps was $3.5 billion at June 30, 2010, compared to $3.4 billion at December 31, 2009. The exposure to credit risk, which is limited to the fair value of the interest rate swaps which were in a gain position, totalled $60 million at June 30, 2010, compared to $76 million at December 31, 2009.

IGM utilizes interest rate swaps to hedge interest rate risk related to the securitization activities discussed above. The negative fair value of these interest rate swaps totalled $39 million at June 30, 2010. The outstanding notional amount was $3.2 billion at June 30, 2010, compared to $3.3 billion at December 31, 2009. The exposure to credit risk, which is limited to the fair value of the interest rate swaps which are in a gain position, totalled $36 million at June 30, 2010, compared to $42 million at December 31, 2009. In addition, IGM enters into other derivative contracts which consist primarily of interest rate swaps utilized to hedge interest rate risk related to mortgages held, or committed to, by IGM. The outstanding notional amount of these derivative contracts was $113 million at June 30, 2010, compared to $75 million at December 31, 2009. The exposure to credit risk, which is limited to the fair value of those instruments which were in a gain position, was nil at June 30, 2010, compared to $3 million at December 31, 2009.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


The aggregate credit risk exposure related to derivatives that are in a gain position of $96 million does not give effect to any netting agreements or collateral arrangements. The exposure to credit risk, giving effect to netting agreements and collateral arrangements, was $59 million at June 30, 2010. Counterparties are all bank-sponsored securitization trusts and Canadian Schedule I chartered banks and, as a result, management of IGM has determined that IGM’s overall credit risk related to derivatives was not significant at June 30, 2010. Management of credit risk has not changed materially since December 31, 2009.

MARKET RISK Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors. Market factors include three types of risks: currency risk, interest rate risk and equity risk. Currency Risk Currency risk relates to the Corporation, its subsidiaries and its investment at equity operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. Power Financial’s financial assets are essentially cash and cash equivalents. In managing its own cash and cash equivalents, Power Financial may hold cash balances denominated in foreign currencies and thus be exposed to fluctuations in exchange rates. In order to protect against such fluctuations, Power Financial may from time to time enter into currency-hedging transactions with highly rated financial institutions. As at June 30, 2010, essentially all of Power Financial’s cash and cash equivalents were denominated in Canadian dollars or in foreign currencies with currency hedges in place. For Lifeco, if the assets backing policy liabilities are not matched by currency, changes in foreign exchange rates can expose Lifeco to the risk of foreign exchange losses not offset by liability decreases.

A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non-participating policy liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non-participating policy liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change to net earnings.

IGM’s financial instruments are generally denominated in Canadian dollars, and do not have significant exposure to changes in foreign exchange rates. Interest Rate Risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Power Financial’s financial instruments are essentially cash and cash equivalents and long-term debt that do not have significant exposure to interest rate risk. With respect to Lifeco, projected cash flows from the current assets and liabilities are used in CALM to determine policy liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Testing under several interest rate scenarios (including increasing and decreasing rates) is done to assess reinvestment risk. One way of measuring the interest rate risk associated with this assumption is to determine the effect on the policy liabilities impacting the shareholder earnings of Lifeco of a 1% immediate parallel shift in the yield curve. These interest rate changes will impact the projected cash flows.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION


› The effect of an immediate 1% parallel increase in the yield curve would be to increase these policy liabilities by approximately $174 million, causing a decrease in net earnings of Lifeco of approximately $121 million (Power Financial’s share – $86 million).

› The effect of an immediate 1% parallel decrease in the yield curve would be to increase these policy liabilities by approximately $43 million, causing a decrease in net earnings of Lifeco of approximately $29 million (Power Financial’s share – $21 million).

In addition to the above, if this change in the yield curve persisted for an extended period the range of the tested scenarios might change. The effect of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported policy liability.

IGM is exposed to interest rate risk on its loan portfolio, fixed income securities, Canada Mortgage Bonds and on certain of the derivative financial instruments used in its mortgage banking and intermediary operations. The objective of IGM’s asset and liability management is to control interest rate risk related to its intermediary operations by actively managing its interest rate exposure. As at June 30, 2010, the total gap between one-year deposit assets and liabilities was within IGM’s trust subsidiaries’ stated guidelines. IGM utilizes interest rate swaps with Canadian Schedule I chartered bank counterparties in order to reduce the impact of fluctuating interest rates on its mortgage banking operations as follows:

› As part of the securitization transactions with bank-sponsored securitization trusts, IGM enters into interest rate swaps with the trusts, which transfers the interest rate risk to IGM. IGM enters into offsetting interest rate swaps with Schedule I chartered banks to hedge this risk. Under these securitization transactions with bank-sponsored securitization trusts, IGM is exposed to ABCP rates and, after effecting its interest rate hedging activities, remains exposed to the basis risk that ABCP rates are greater than bankers’ acceptance rates.

› As part of the securitization transactions under the CMB Program, IGM enters into interest rate swaps with Schedule I chartered bank counterparties that transfer the interest rate risk associated with the program, including reinvestment risk, to IGM. To manage these interest rate and reinvestment risks, IGM enters into offsetting interest rate swaps with Schedule I chartered bank counterparties to reduce the impact of fluctuating interest rates.

› IGM is exposed to the impact that changes in interest rates may have on the value of its investments in Canada Mortgage Bonds. IGM enters into interest rate swaps with Schedule I chartered bank counterparties to hedge interest rate risk on these bonds.

› IGM is also exposed to the impact that changes in interest rates may have on the value of mortgages held, or committed to, by IGM. IGM may enter into interest rate swaps to hedge this risk.

As at June 30, 2010, the impact to IGM’s net earnings of a 100-basis-point change in interest rates would have been approximately $0.2 million (Power Financial’s share – $0.1 million). IGM’s exposure to and management of interest rate risk has not changed materially since December 31, 2009. Equity Risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. To mitigate equity risk, the Corporation and its subsidiaries have investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. Power Financial’s financial instruments are essentially cash and cash equivalents, and long-term debt that do not have exposure to equity price risk.

For Lifeco, the risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Benefit guarantees consisting of purchasing equity futures, currency forwards, and interest rate swaps. For policies with segregated fund guarantees, Lifeco generally determines policy liabilities at a CTE75 (conditional tail expectation of 75) level.



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N


Some policy liabilities are supported by real estate, common stocks, and private equities, for example, segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity market values. There will be additional impacts on these liabilities as equity market values fluctuate. A 10% increase in equity markets would be expected to additionally decrease non-participating policy liabilities by approximately $31 million, causing an increase in net earnings of Lifeco of approximately $23 million (Power Financial’s share – $16 million). A 10% decrease in equity markets would be expected to additionally increase non-participating policy liabilities by approximately $114 million, causing a decrease in net earnings of Lifeco of approximately $81 million (Power Financial’s share – $57 million).

The best estimate return assumptions for equities are primarily based on long-term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows. A 1% increase in the best estimate assumption would be expected to decrease non-participating policy liabilities by approximately $307 million, causing an increase in net earnings of Lifeco of approximately $224 million (Power Financial’s share – $158 million). A 1% decrease in the best estimate assumption would be expected to increase non-participating policy liabilities by approximately $361 million, causing a decrease in net earnings of Lifeco of approximately $261 million (Power Financial’s share – $185 million).

IGM is exposed to equity price risk on its investments in common shares and proprietary investment funds. IGM adheres to an Investment Policy that outlines the objectives, constraints and parameters relating to its investing activities. This policy prescribes limits around the quality and concentration of investments held by IGM. IGM may manage its exposure to equity price risk on a portion of its corporate securities portfolio by using a variety of derivative instruments, including options and forward contracts. Management of IGM regularly reviews its investments to ensure all activities are in adherence to the Investment Policy. The fair value of the common share portfolio was $18 million at June 30, 2010, compared to $237 million at December 31, 2009. Unrealized losses at June 30, 2010 were $3 million, compared to unrealized gains of $1 million at December 31, 2009. Investments in common shares are reviewed periodically, or more frequently when conditions warrant, to determine whether there is objective evidence of impairment in value that is other than temporary. Factors that are considered include the length of time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer, as well as IGM’s intent and ability to hold the investments for a period of time sufficient to allow for any anticipated recovery. As at June 30, 2010, the impact of a 10% decrease in equity prices would have been a $4 million unrealized loss recorded in other comprehensive income for IGM (Power Financial’s share – $2 million). IGM’s management of equity price risk has not changed materially since December 31, 2009. However, IGM’s exposure to equity price risk has declined materially since December 31, 2009 as a result of the reduction in its securities holdings during 2010.



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 8 FINANCING CHARGES

Three months ended


June 30 2010 2009 2010 2009 Interest on debentures and other borrowings 94 85 182 164 Preferred share dividends 4 18 10 36 Net interest on capital trust debentures and securities 8 11 16 21 Unrealized loss (gain) on preferred shares classified as held for trading – 31 (2) 32 Other 3 2 7 4 109 147 213 257

NOTE 9 EARNINGS PER SHARE

The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per common share computations:

Three months ended


June 30 2010 2009 2010 2009 Net earnings 429 452 818 647Dividends on perpetual preferred shares (23) (20) (46 ) (43) Net earnings available to common shareholders 406 432 772 604 Weighted number of common shares outstanding (millions)

– Basic 706.2 705.7 706.0 705.4 Exercise of stock options 3.3 5.5 3.3 5.5 Shares assumed to be repurchased with proceeds from exercise of stock options (2.4) (4.1) (2.4 ) (4.4) Weighted number of common shares outstanding (millions) – Diluted 707.1 707.1 706.9 706.5 For 2010, 4,454,408 stock options (4,416,115 in 2009) have been excluded from the computation of diluted earnings per share as the exercise price was higher than the market price.

Three months ended


June 30 2010 2009 2010 2009 Earnings per common share ($) – Basic 0.57 0.61 1.09 0.86 – Diluted 0.57 0.61 1.09 0.86



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 10 PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS

The total benefit costs included in operating expenses are as follows:

Three months ended


June 30 2010 2009 2010 2009Pension plans 28 23 47 42Other post-retirement benefits 5 4 8 8 33 27 55 50

NOTE 11 SECURITIZATIONS

IGM securitizes residential mortgages through CMHC or Canadian bank-sponsored securitization trusts. IGM issues NHA MBS which are sold to a trust that issues securities to investors through the CMHC-sponsored CMB Program. Pre-tax gains (losses) on the sale of mortgages are reported in net investment income in the consolidated statements of earnings. Securitization activities for the three- and six-month periods ended June 30, 2010 and 2009 were as follows:

Three months ended


June 30 2010 2009 2010 2009 Residential mortgages securitized 351 401 555 621 Net cash proceeds 349 399 551 617 Fair value of retained interests 11 16 20 31 Pre-tax gain on sales 6 17 12 29



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION

NOTE 12 SEGMENTED INFORMATION

INFORMATION ON PROFIT MEASURE

Three months ended June 30, 2010 Lifeco IGM Parjointco Other TotalRevenues Premium income 4,215 – – – 4,215Net investment income Regular net investment income 1,342 17 – (21 ) 1,338 Change in fair value on held-for-trading assets 1,091 10 – – 1,101 2,433 27 – (21 ) 2,439Fee income 718 617 – (26 ) 1,309 7,366 644 – (47 ) 7,963Expenses Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities 5,622 – – –

5,622Commissions 364 215 – (25 ) 554Operating expenses 714 161 – 14 889Financing charges 70 28 – 11 109 6,770 404 – – 7,174 596 240 – (47 ) 789Share of earnings of investment at equity – – 57 – 57Other income (charges), net – – (4) – (4)Earnings before income taxes and non-controlling interests 596 240 53 (47 ) 842Income taxes 115 57 – (1 ) 171Non-controlling interests 184 82 – (24 ) 242Contribution to consolidated net earnings 297 101 53 (22 ) 429



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N

NOTE 12 SEGMENTED INFORMATION (continued)


Three months ended June 30, 2009 Lifeco IGM Parjointco Other TotalRevenues Premium income 4,664 – – – 4,664Net investment income Regular net investment income 1,616 63 – (10 ) 1,669 Change in fair value on held-for-trading assets 2,272 (20) – – 2,252 3,888 43 – (10 ) 3,921Fee income 666 549 – (23 ) 1,192 9,218 592 – (33 ) 9,777Expenses Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities 7,473 – – –

7,473Commissions 353 198 – (23 ) 528Operating expenses 721 158 – 10 889Financing charges 106 32 – 9 147 8,653 388 – (4 ) 9,037 565 204 – (29 ) 740Share of earnings of investment at equity – – 87 – 87Other income (charges), net – – (2) 12 10Earnings before income taxes and non-controlling interests 565 204 85 (17 ) 837Income taxes 122 59 – – 181Non-controlling interests 159 60 – (15 ) 204Contribution to consolidated net earnings 284 85 85 (2 ) 452



PO

WER

FINA

NC

IAL C

OR

PO

RA

TION



Six months ended June 30, 2010 Lifeco IGM Parjointco Other TotalRevenues Premium income 8,825 – – – 8,825Net investment income Regular net investment income 2,764 55 – (42 ) 2,777 Change in fair value on held-for-trading assets 2,593 10 – – 2,603 5,357 65 – (42 ) 5,380Fee income 1,454 1,228 – (50 ) 2,632 15,636 1,293 – (92 ) 16,837Expenses Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities 12,193 – – –

12,193Commissions 727 430 – (50 ) 1,107Operating expenses 1,432 322 – 27 1,781Financing charges 139 55 – 19 213 14,491 807 – (4 ) 15,294 1,145 486 – (88 ) 1,543Share of earnings of investment at equity – – 54 – 54Other income (charges), net – – 4 – 4Earnings before income taxes and non-controlling interests 1,145 486 58 (88 ) 1,601Income taxes 201 122 – (1 ) 322Non-controlling interests 343 162 – (44 ) 461Contribution to consolidated net earnings 601 202 58 (43 ) 818



PO

WER

FIN

AN

CIA

L C

OR

PO

RA

TIO

N



Six months ended June 30, 2009 Lifeco IGM Parjointco Other TotalRevenues Premium income 9,373 – – – 9,373Net investment income Regular net investment income 3,127 125 – (38 ) 3,214 Change in fair value on held-for-trading assets 305 (29) – – 276 3,432 96 – (38 ) 3,490Fee income 1,346 1,059 – (43 ) 2,362 14,151 1,155 – (81 ) 15,225Expenses Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities 10,839 – – –

10,839Commissions 660 390 – (43 ) 1,007Operating expenses 1,461 317 – 23 1,801Financing charges 181 59 – 17 257 13,141 766 – (3 ) 13,904 1,010 389 – (78 ) 1,321Share of earnings of investment at equity – – 67 – 67Other income (charges), net – – (59) 12 (47)Earnings before income taxes and non-controlling interests 1,010 389 8 (66 ) 1,341Income taxes 200 111 – – 311Non-controlling interests 302 125 – (44 ) 383Contribution to consolidated net earnings 508 153 8 (22 ) 647



GR

EA

T-WEST LIFEC

O IN

C.

MANAGEMENT’S DISCUSSION AND ANALYSIS

PA G E B 2


PA G E B 3 3

JUNE 30, 2010

Please note that the bottom of each page in Part B contains two diff erent page numbers. A page number with the prefi x “B” refers to the number of such page in this document and the page number without any prefi x refers to the number of such page in the original document issued by Great-West Lifeco Inc.

The attached documents concerning Great-West Lifeco Inc. are documents prepared and publicly disclosed by such subsidiary. Certain statements in the attached documents, other than statements of historical fact, are forward-looking statements based on certain assumptions and refl ect the current expectations of the subsidiary as set forth therein. Forward-looking statements are provided for the purposes of assisting the reader in understanding the subsidiary’s fi nancial position and results of operations as at and for the periods ended on certain dates and to present information about the subsidiary’s management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes.

By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specifi c and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved.

For further information provided by the subsidiary as to the material factors that could cause actual results to diff er materially from the content of forward-looking statements and the material factors and assumptions that were applied in making the forward-looking statements, please see the attached documents, including the section entitled Cautionary Note Regarding Forward-Looking Information. The reader is cautioned to consider these factors and assumptions carefully and not to put undue reliance on forward-looking statements.


PA RT B

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 B 1

PFC_QUAT2_ENG02_GWL_2010-08-04_v01.indd B1PFC_QUAT2_ENG02_GWL_2010-08-04_v01.indd B1 8/6/10 8:44:45 AM8/6/10 8:44:45 AM

GR

EA

T-W

EST

LIFE

CO

INC

.

Management's Discussion & Analysis


FOR THE PERIOD ENDED JUNE 30, 2010

DATED: AUGUST 4, 2010

The Management’s Discussion and Analysis (MD&A) presents management’s view of the financial condition,results of operations and cash flows of Great-West Lifeco Inc. (Lifeco or the Company) for the three months and sixmonths ended June 30, 2010 compared with the same periods in 2009, and for the three months ended March 31,2010. The MD&A provides an overall discussion, followed by analysis of the performance of its three majorreportable segments: Canada, United States and Europe.

BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIESThe consolidated financial statements of Lifeco, which are the basis for data presented in this report, have beenprepared in accordance with Canadian generally accepted accounting principles (GAAP) and are presented inmillions of Canadian dollars unless otherwise indicated. The MD&A should be read in conjunction with the annualMD&A and consolidated financial statements in the Company’s 2009 Annual Report to Shareholders.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATIONThis report contains some forward-looking statements about the Company, including its business operations, strategy andexpected financial performance and condition. Forward-looking statements include statements that are predictive in nature,depend upon or refer to future events or conditions, or include words such as “expects”, “anticipates”, “intends”, “plans”,“believes”, “estimates” or negative versions thereof and similar expressions. In addition, any statement that may be madeconcerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies orprospects, and possible future action by the Company, including statements made by the Company with respect to the expectedbenefits of acquisitions or divestitures, are also forward-looking statements. Forward-looking statements are based on currentexpectations and projections about future events and are inherently subject to, among other things, risks, uncertainties andassumptions about the Company, economic factors and the financial services industry generally, including the insurance andmutual fund industries. They are not guarantees of future performance, and actual events and results could differ materiallyfrom those expressed or implied by forward-looking statements made by the Company due to, but not limited to, importantfactors such as sales levels, premium income, fee income, expense levels, mortality experience, morbidity experience, policylapse rates and taxes, as well as general economic, political and market factors in North America and internationally, interestand foreign exchange rates, global equity and capital markets, business competition, technological change, changes ingovernment regulations, unexpected judicial or regulatory proceedings, catastrophic events, and the Company's ability tocomplete strategic transactions and integrate acquisitions. The reader is cautioned that the foregoing list of important factors isnot exhaustive, and there may be other factors, including factors set out under “Risk Management and Control Practices” in theCompany’s 2009 Annual MD&A, and any listed in other filings with securities regulators, which are available for review atwww.sedar.com. The reader is also cautioned to consider these and other factors carefully and to not place undue reliance onforward-looking statements. Other than as specifically required by applicable law, the Company has no intention to update anyforward-looking statements whether as a result of new information, future events or otherwise.

CAUTIONARY NOTE REGARDING NON-GAAP FINANCIAL MEASURESThis report contains some non-GAAP financial measures. Terms by which non-GAAP financial measures are identified include,but are not limited to, “operating earnings”, “constant currency basis”, “premiums and deposits”, “sales”, and other similarexpressions. Non-GAAP financial measures are used to provide management and investors with additional measures ofperformance. However, non-GAAP financial measures do not have standard meanings prescribed by GAAP and are not directlycomparable to similar measures used by other companies. Refer to the appropriate reconciliations of these non-GAAP financialmeasures to measures prescribed by GAAP.

4

B 2 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


GR

EA

T-WEST LIFEC

O IN

C.


CONSOLIDATED OPERATING RESULTS

Selected consolidated financial information(in $ millions, except for per share amounts) As at or for the three months ended For the six months ended

June 30 2010

March 312010

June 30 2009

June 30 2010

June 30 2009

Premiums and deposits:Life insurance, guaranteed annuitiesand insured health products

$ 4,215 $ 4,610 $ 4,664 $ 8,825 $ 9,373

Self-funded premium equivalents (ASOcontracts)

657 645 639 1,302 1,257

Segregated funds deposits:Individual products 1,633 1,790 1,699 3,423 2,957Group products 2,335 1,730 1,823 4,065 4,519

Proprietary mutual funds & institutionaldeposits 5,389 6,191 5,140 11,580 10,420

Total premiums and deposits 14,229 14,966 13,965 29,195 28,526Fee and other income 718 736 666 1,454 1,346Paid or credited to policyholders 5,622 6,571 7,473 12,193 10,839Net earnings - common shareholders 433 441 413 874 739Per common shareBasic earnings $ 0.457 $ 0.466 $ 0.437 $ 0.923 $ 0.783Dividends paid 0.3075 0.3075 0.3075 0.615 0.615Book value 12.30 11.88 12.65Return on common shareholders'

equity (12 months)Net earnings %15.2 %15.0 %2.3Total assets $ 131,320 $ 126,842 $ 131,644Segregated funds net assets 87,023 87,349 83,192Proprietary mutual funds and institutional

net assets 119,069 123,665 121,729Total assets under management 337,412 337,856 336,565Other assets under administration 122,778 125,329 105,341Total assets under administration $ 460,190 $ 463,185 $ 441,906Share capital and surplus $ 13,309 $ 12,907 $ 13,270

2010 DEVELOPMENTS

While earnings growth was positive in the local currencies of all regions the Company operates in, as compared tothe same periods in 2009, the continued strengthening of the Canadian dollar against the US dollar, British poundand the euro had a negative effect on net earnings when translating into Canadian dollars. This strengthening ofthe Canadian dollar has also caused a modest reduction of the Company’s surplus account and book value pershare since December 31, 2009.

Since the beginning of the year, equity market levels and interest rates have declined in the various economies inwhich the Company operates. In the second quarter equity markets fell to below December 31, 2009 levels. Yieldson government bonds decreased in the second quarter in Canada, the U.S. and the U.K. which were partially offsetby increasing spreads on corporate bonds.

The index levels for the S&P TSX, S&P 500 and the FTSE 100 decreased 3.8%, 7.6% and 9.2% respectively yearto date, as a result of decreases of 6.2%, 11.9% and 13.4% during the second quarter of 2010.

5



GR

EA

T-W

EST

LIFE

CO

INC

.


North American equity markets fell sharply toward the end of the second quarter leaving average levels for the S&PTSX and S&P 500 indices 1.5% and 1.0% higher than the average for the first quarter of 2010 and 20% and 27%higher than for the second quarter of 2009. The FTSE 100 Index was 1.4% lower than the average for the firstquarter of 2010, and 26% higher than for the second quarter of 2009.

On a year to date basis, average levels for the S&P TSX, S&P 500 and the FTSE 100 indices were 28%, 33% and30% higher than for the same period in 2009. The decline in interest rates for the first six months of 2010contributed to a general increase in the fair value of bonds. The higher average equity and bond values resulted inhigher average assets under management and higher fee income, as compared to similar periods in 2009.

NET EARNINGSConsolidated net earnings of Lifeco include the net earnings of The Great-West Life Assurance Company (Great-West Life) and its operating subsidiaries London Life Insurance Company (London Life) and The Canada LifeAssurance Company (Canada Life), Great-West Life & Annuity Insurance Company (GWL&A) and PutnamInvestments, LLC (Putnam), together with Lifeco’s corporate results.

Lifeco's net earnings attributable to common shareholders for the three month period ended June 30, 2010 were$433 million compared to $413 million reported a year ago. On a per share basis, this represents $0.457 percommon share ($0.457 diluted) for the second quarter of 2010 compared to $0.437 per common share ($0.437diluted) a year ago.

For the six months ended June 30, 2010, Lifeco's net earnings attributable to common shareholders were $874million compared to $739 million reported a year ago, an increase of 18%. On a per share basis, this represents$0.923 per common share ($0.922 diluted) for 2010 compared to $0.783 per common share ($0.782 diluted) a yearago.

For the three months ended June 30, 2010, the strengthening of the Canadian dollar against the US dollar, theBritish pound and the euro had a negative currency impact on Lifeco’s net earnings of $33 million or $0.035 percommon share compared to the same period in 2009. For the six months ended June 30, 2010, negative currencyimpact on net earnings was $64 million or $0.067 per common share compared to 2009.

Return on common shareholders’ equity (ROE) improved from December 31, 2009 due mainly to higher netearnings. The Company achieved a 15.2% ROE, consistent with its long-term objective. The first and secondquarter 2009 results, which were negatively impacted by the global financial crisis, are no longer included in thetrailing twelve month ROE calculation.

6



GR

EA

T-WEST LIFEC

O IN

C.


Net earnings - common shareholdersFor the three months ended For the six months ended

June 302010

March 31 2010

June 30 2009

June 302010

June 302009

CanadaIndividual Insurance & InvestmentProducts

$ 165 $ 159 $ 160 $ 324 $ 287

Group Insurance 97 92 106 189 199Canada Corporate (25) (18) (49) (43) (61)

237 233 217 470 425United States

Financial Services 82 82 79 164 165Asset Management (28) (15) (31) (43) (42)U.S. Corporate - 1 1 1 1

54 68 49 122 124Europe

Insurance & Annuities 126 101 101 227 131Reinsurance 20 41 51 61 72Europe Corporate (4) (2) (3) (6) (6)

142 140 149 282 197Lifeco Corporate - - (2) - (7)Net earnings $ 433 $ 441 $ 413 $ 874 $ 739

The information in the table is a summary of results for net earnings of the Company. A detailed discussionregarding net earnings can be found in Segmented Operating Results.

PREMIUMS AND DEPOSITS AND SALESPremiums and deposits includes premiums on risk-based insurance and annuity products, premium equivalents onself-funded group insurance administrative services only contracts, deposits on individual and group segregatedfund products and deposits on proprietary mutual funds and institutional accounts.

Sales include 100% of single premium and annualized recurring premium on risk-based and annuity products,deposits on individual and group segregated fund products, deposits on proprietary mutual funds and institutionalaccounts and deposits on non-proprietary mutual funds.

7



GR

EA

T-W

EST

LIFE

CO

INC

.


Premiums and depositsFor the three months ended For the six months ended

June 302010

March 31 2010

June 302009

June 302010

June 302009

CanadaIndividual Insurance & InvestmentProducts

$ 2,920 $ 3,134 $ 3,140 $ 6,054 $ 5,750

Group Insurance 1,732 1,718 1,682 3,450 3,3374,652 4,852 4,822 9,504 9,087

United StatesFinancial Services 2,058 1,755 1,186 3,813 4,045Asset Management 5,245 6,001 4,994 11,246 10,117

7,303 7,756 6,180 15,059 14,162Europe

Insurance & Annuities 1,408 1,490 1,866 2,898 3,029Reinsurance 866 868 1,097 1,734 2,248

2,274 2,358 2,963 4,632 5,277Total $ 14,229 $ 14,966 $ 13,965 $ 29,195 $ 28,526

SalesFor the three months ended For the six months ended

June 302010

March 31 2010

June 302009

June 302010

June 302009

Canada $ 2,285 $ 2,674 $ 2,432 $ 4,959 $ 4,217United States 6,826 11,620 6,211 18,446 14,385Europe 1,097 1,090 1,376 2,187 2,171

Total $ 10,208 $ 15,384 $ 10,019 $ 25,592 $ 20,773

The information in the table is a summary of results for premiums and deposits and sales of the Company. Adetailed discussion regarding premiums and deposits and sales can be found in Segmented Operating Results.

NET INVESTMENT INCOME

Net investment incomeFor the three months ended For the six months ended

June 302010

March 31 2010

June 302009

June 302010

June 302009

Investment income earned $ 1,356 $ 1,412 $ 1,617 $ 2,768 $ 3,075Amortization of net realized and

unrealized gains/(losses) on realestate investments 5 2 (6) 7 (10)

(Provision)/recovery of credit losses onloans and receivables (1) - (11) (1) (30)

Other net realized gains/(losses) 2 25 33 27 125Regular investment income 1,362 1,439 1,633 2,801 3,160Investment expenses (20) (17) (17) (37) (33)Regular net investment income 1,342 1,422 1,616 2,764 3,127Changes in fair value of held for trading

assets 1,091 1,502 2,272 2,593 305Net investment income $ 2,433 $ 2,924 $ 3,888 $ 5,357 $ 3,432

8



GR

EA

T-WEST LIFEC

O IN

C.


Net investment income in the second quarter of 2010 decreased by $1,455 million compared to the same periodlast year. The year-over-year decrease is primarily due to an increase in fair value of held for trading assets of$1,091 million in 2010 compared to an increase in fair value of held for trading assets of $2,272 million in 2009. Inthe second quarter of 2010, fair values were favourably impacted by a decrease in government bond rates, partlyoffset by equity market declines. Regular net investment income decreased $274 million in the quarter, primarilydue to currency movement.

For the six months ended June 30, 2010 net investment income increased by $1,925 million compared to the sameperiod last year. The year-over-year increase is primarily due to the increase in fair value of held for trading assetsof $2,288 million due to an improvement in bond values attributable to decreased government bond rates. Regularnet investment income decreased $363 million primarily as a result of currency movement and the $60 million pre-tax gain on sale of Putnam’s indirect equity investment in Union PanAgora Asset Management GmbH (UnionPanAgora) recorded in 2009. These decreases were partially offset by higher amortization of net realized andunrealized gains/(losses) on real estate investments as a result of market value improvements on real estate andlower provisions for credit losses on loans and receivables.

The decrease in net investment income in the second quarter compared to the first quarter of 2010 is primarily dueto the changes in fair value of held for trading assets, a $1,091 million increase in the second quarter of 2010compared to an increase of $1,502 million in the first quarter of 2010.

Credit markets impact on common shareholders' net earnings (after tax)

For the three months ended June 30, 2010

For the six months ended June 30, 2010

Impairment(charges)/recoveries

Charges forfuturecreditlosses

in actuarialliabilities Total

Impairment(charges)/recoveries

Charges forfuturecreditlosses

in actuarialliabilities Total

Canada $ - $ 1 $ 1 $ 2 $ 1 $ 3United States (5) (2) (7) (9) (5) (14)Europe 15 2 17 26 18 44Total $ 10 $ 1 $ 11 $ 19 $ 14 $ 33

Per common share $ 0.012 $ 0.035

Investment impairment chargesNet impairment impact for the three months ended June 30, 2010 attributable to common shareholders was arecovery of $14 million pre-tax or $10 million after-tax and for the six months ended June 30, 2010 was a recoveryof $25 million pre-tax or $19 million after-tax.

During the three months ended June 30, 2010, charges on newly impaired investments of $43 million were morethan offset by a release of $58 million of asset default provisions that were held in actuarial liabilities specific tothese investments. In addition, market value increases on previously impaired assets resulted in a $28 millionrecovery in the quarter. In certain circumstances impairment charges and recoveries may result in a change tointerest rate credits on policyholder funds through pass-through features in the particular policy. As a result ofpass-through provisions and other actuarial offsets, the positive impact of impairment recoveries on net earningswas reduced by $29 million pre-tax.

9



GR

EA

T-W

EST

LIFE

CO

INC

.


Charges for future credit losses in actuarial liabilitiesThe release of provisions for future credit losses relating to in period credit rating net upgrades positively impactedearnings attributable to common shareholders by $2 million pre-tax, or $1 million after-tax for the three monthsended June 30, 2010. The increase in provisions for future credit losses relating to the six months ended June 30,2010 negatively impacted pre-tax earnings attributable to common shareholders by $11 million pre-tax. This wasoffset by a reduction of $28 million pre-tax of actuarial credit default provisions that had previously been establishedpending the outcome of rating reviews initiated in 2009 by Moody’s Investors Services and Fitch Ratings. The netimpact of changes in credit ratings for the six months ended June 30, 2010 positively impacted commonshareholder earnings by $17 million pre-tax or $14 million after-tax.

FEE AND OTHER INCOMEIn addition to providing traditional risk-based insurance products, the Company also provides certain products on afee-for-service basis. The most significant of these products are segregated funds and mutual funds, for which theCompany earns investment management fees on assets managed and other fees, and administrative services only(ASO) contracts, under which the Company provides group benefit plan administration on a cost-plus basis.

Fee and other incomeFor the three months ended For the six months ended

June 302010

March 31 2010

June 302009

June 302010

June 302009

CanadaSegregated funds, mutual funds and

other$ 219 $ 220 $ 195 $ 439 $ 382

ASO contracts 36 36 34 72 69255 256 229 511 451

United StatesSegregated funds, mutual funds and

other307 317 291 624 574

ASO contracts - - - - -307 317 291 624 574

EuropeSegregated funds, mutual funds and

other156 163 146 319 321

ASO contracts - - - - -156 163 146 319 321

$ 718 $ 736 $ 666 $ 1,454 $ 1,346

The information in the table is a summary of results for fee and other income for the Company. A detaileddiscussion regarding fee and other income can be found in Segmented Operating Results.

PAID OR CREDITED TO POLICYHOLDERSAmounts paid or credited to policyholders include changes in policy liabilities, claims, surrenders, annuity andmaturity payments, segregated funds guarantee payments and dividend and experience refund payments for risk-based products. The change in policy liabilities includes adjustments to actuarial liabilities for changes in fair valueof certain invested assets backing those actuarial liabilities and changes in the provision for future credit losses inactuarial liabilities. These amounts do not include benefit payment amounts for ASO contracts or redemptions ofsegregated funds and mutual funds.

For the three months ended June 30, 2010, consolidated amounts paid or credited to policyholders in 2010 were$5.6 billion, a decrease of $807 million in Canada, $116 million in the United States, and $928 million in Europecompared to the second quarter of 2009. The decrease is primarily due to lower increases in the fair value ofinvested assets backing actuarial liabilities and the effect of currency movement.

10



GR

EA

T-WEST LIFEC

O IN

C.


For the six months ended June 30, 2010, consolidated amounts paid or credited to policyholders were $12.2 billion,an increase of $1,354 million from 2009. Canada was up $190 million, the United States was up $230 million andEurope was up $934 million, primarily due to an increase in the fair value of invested assets backing actuarialliabilities partly offset by currency movement.

Compared to the first quarter of 2010, amounts paid or credited to policyholders decreased $949 million primarilydue to a lower increase in the fair value of invested assets backing actuarial liabilities. CONSOLIDATED FINANCIAL POSITION

ASSETS

Consolidated total assets under administrationJune 30, 2010

Canada United States Europe TotalAssets

Invested assets $ 50,391 $ 26,422 $ 29,308 $ 106,121Goodwill and intangible assets 5,089 1,841 1,701 8,631Other assets 2,554 2,637 11,377 16,568

Total assets 58,034 30,900 42,386 131,320Segregated funds net assets 44,867 20,378 21,778 87,023Proprietary mutual funds and institutional net assets 2,829 116,240 - 119,069Total assets under management 105,730 167,518 64,164 337,412Other assets under administration 10,858 111,822 98 122,778Total assets under administration $ 116,588 $ 279,340 $ 64,262 $ 460,190

December 31, 2009 Canada United States Europe Total

AssetsInvested assets $ 48,585 $ 24,762 $ 29,409 $ 102,756Goodwill and intangible assets 5,093 1,830 1,721 8,644Other assets 2,180 2,670 12,119 16,969

Total assets 55,858 29,262 43,249 128,369Segregated funds net assets 45,005 19,690 22,800 87,495Proprietary mutual funds and institutional net assets 2,811 120,693 - 123,504Total assets under management 103,674 169,645 66,049 339,368Other assets under administration 10,905 108,192 110 119,207Total assets under administration $ 114,579 $ 277,837 $ 66,159 $ 458,575

Total assets under administration at June 30, 2010 increased $1.6 billion from December 31, 2009. Investedassets increased by approximately $3.4 billion due mainly to an increase in fair value. Segregated funds andmutual funds and institutional net assets decreased by approximately $4.9 billion from December 31, 2009 primarilyas a result of equity markets falling to below December 31, 2009 levels.

Goodwill and intangible assets decreased by approximately $13 million due to the strengthening of the Canadiandollar and amortization of finite life intangible assets.

11



GR

EA

T-W

EST

LIFE

CO

INC

.


Impaired investmentsJune 30, 2010 December 31, 2009

Grossamount

Other thantemporaryimpairment

Carryingamount

Grossamount

Other thantemporaryimpairment

Carryingamount

Impaired investments by type (1)

Held for trading $ 577 $ (257) $ 320 $ 527 $ (282) $ 245Available for sale 57 (33) 24 55 (36) 19Loans and receivables 152 (80) 72 151 (81) 70

Total $ 786 $ (370) $ 416 $ 733 $ (399) $ 334

(1) Includes impaired amounts on certain funds held by ceding insurers.

The gross amount of impaired investments totaled $786 million or 0.74% of portfolio investments (including certainassets reported as funds held by ceding insurers) at June 30, 2010 compared with $733 million or 0.72% atDecember 31, 2009. The $53 million increase in the gross amount of impaired investments included a first quarterimpairment of $169 million of bonds that were subject to credit guarantees provided by Ambac Financial Group,Inc. (Ambac), as well as a $20 million increase in impaired mortgages. This was offset by $136 million of disposaland redemption activity and currency movement. Impairment provisions at June 30, 2010 were $370 million compared to $399 million at December 31, 2009, adecrease of $29 million. The decrease results from year to date disposals which had provisions of $47 million andpositive mark-to-market revaluation of $60 million on previously impaired items. These decreases were offset byinvestment impairment charges of $81 million related to Ambac insured bonds in the first quarter. Currencymovement further reduced impairment provisions by $3 million.

On April 6, 2010, Royal Bank of Scotland announced an offer to exchange (the RBS exchange) certain Upper Tier2 and Tier 1 securities for new senior debt. In response to this offer, the Company exchanged Upper Tier 2 andTier 1 holdings with an amortized cost of $208 million for $167 million of senior debt. The securities exchanged hadbeen rated as below investment grade, and the $41 million difference between the securities exchanged and thesenior debt received was recorded as an impairment charge. As a result of the exchange, the Company released$58 million of asset default provisions that were being held in actuarial liabilities against the exchanged assets, andestablished a $6 million asset default provision in actuarial liabilities against the investment grade rated senior debt.

On April 26, 2010, Bank of Ireland announced an offer to exchange certain of its non-US Tier 1 securities, as partof a wider capital raising exercise. In response, the Company exchanged Bank of Ireland non-cumulative securitiesthat had previously been deemed impaired and had a carrying amount of $11 million at March 31, 2010. Inexchange, the Company ultimately received cash proceeds of $15 million resulting in an in quarter recovery of $4million.

On June 2, 2010, Bradford & Bingley announced a cash tender offer for a range of subordinated debt securities. Inresponse, the Company exchanged Bradford & Bingley securities that had previously been deemed impaired andhad a carrying amount of $8 million at March 31, 2010. In exchange, the Company received cash proceeds of $13million resulting in an in quarter recovery of $5 million.

12

B 1 0 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


GR

EA

T-WEST LIFEC

O IN

C.


Performing securities subject to deferred couponsThe Company holds certain securities issued by Lloyds Banking Group (Lloyds) and Bank of Ireland that providefor the payment of coupons on a cumulative basis, and where the issuer has deferred the payment of thosecoupons.

Performing securities subject to deferred coupons

Cumulative Grossamount

Unrealizedgains(losses)

Carryingamount

Accruedincomedeferred

Deferralperiod

Lloyds Banking Group $ 117 $ (24) $ 93 $ 6 2010 to 2012Bank of Ireland 7 (2) 5 1 2010 to 2012

$ 124 $ (26) $ 98 $ 7

At June 30, 2010, the Company held securities with a gross amount of $124 million where the issuer has exercisedits contractual right to defer the payment of coupons. Based on information presently available, managementbelieves there is reasonable assurance of collection of the deferred coupons at the end of the deferral period. Theactuarial cash flow valuation models used by the Company recognize the delay in receipt of these coupons in thereserve setting process and the Company’s actuarial liabilities at June 30, 2010 include asset default provisions of$53 million in connection with these securities.

Unrealized mark-to-market lossesAt June 30, 2010, gross unrealized bond losses totaled $1,655 million ($3,054 million at December 31, 2009), ofwhich $1,564 million are held for trading bonds, held primarily in support of actuarial liabilities. The changes in thefair value of these held for trading bonds, excluding investment impairment charges, have been offset by acorresponding change in the value of the actuarial liabilities on the basis of management’s assessment that theCompany will ultimately receive all contractual cash flows on these bonds.

Provision for future credit lossesAt June 30, 2010, the total provision for future credit losses in actuarial liabilities was $2,297 million, compared to$2,467 million at December 31, 2009, a decrease of $170 million.

The $170 million decrease in the provision consists of $86 million release in connection with investments with anassociated impairment charge including $58 million related to the RBS exchange, a $14 million net decreaserelating to credit rating activity and a $70 million net decrease mainly due to currency movement.

The aggregate of impairment provisions of $370 million ($399 million at December 31, 2009) and $2,297 million($2,467 million at December 31, 2009) provision for future credit losses in actuarial liabilities represents 2.8% ofbond and mortgage assets at June 30, 2010 (3.1% at December 31, 2009). LIABILITIESTotal liabilities have increased from $112.3 billion at December 31, 2009 to $115.1 billion at June 30, 2010. Policyliabilities increased by $2.0 billion primarily due to an increase in the fair value of invested assets backing actuarialliabilities.

Guarantees associated with investment productsThe Company offers retail segregated fund products, unitized with profits products and variable annuity productsthat provide for certain guarantees that are tied to the market values of the investment funds to which policyholdershave directed deposits made under their policies.

The guaranteed minimum withdrawal benefits (GMWB) products offered by the Company offer levels of death andmaturity guarantees. At June 30, 2010, the amount of GMWB product in-force in Canada, United States and

13

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 B 1 1


GR

EA

T-W

EST

LIFE

CO

INC

.


Germany was $352 million ($119 million at December 31, 2009). Through its hedging program, the Company, atJune 30, 2010, had entered into index futures with an aggregate notional amount of $24 million ($5 million atDecember 31, 2009) to mitigate equity market risk, interest futures with an aggregate notional amount of $1 millionto mitigate interest rate risk, interest rate swaps with an aggregate notional amount of $89 million ($19 million atDecember 31, 2009) to mitigate interest rate risk, and foreign currency forward contracts with an aggregatenotional amount of $12 million ($3 million at December 31, 2009) to mitigate foreign currency translation risk.

Segregated funds guarantee exposureJune 30, 2010

Deficiency by benefit typeMarket value Death Maturity Income

CanadaGreat-West Life/London Life/Canada Life $ 21,052 $ 542 $ 63 $ -London Reinsurance Group 80 - 11 -Sub-total 21,132 542 74 -

United StatesGWL&A 7,670 199 - -London Reinsurance Group 1,105 68 - 560Sub-total 8,775 267 - 560

Europe 1,762 129 - -

Total $ 31,669 $ 938 $ 74 $ 560

At June 30, 2010, the excess of policyholder guaranteed minimum death benefits (GMDB) over the market value ofthe policyholder funds was $938 million. This should be interpreted to mean that if all of the policyholders with in-the-money guaranteed minimum death benefits had died on June 30, 2010, the Company would have beenobligated to pay death benefits of approximately $32.6 billion, or $938 million ($760 million at December 31, 2009)in excess of the market value of the policyholder’s funds on that date. If markets were to remain at June 30, 2010levels, the GMDB related payments over the next twelve months are estimated to be $13 million ($10 million atDecember 31, 2009).

For purposes of determining required capital for guarantees a Total Gross Calculated Requirement (TGCR) isdetermined. The TGCR was $12 million at June 30, 2010 ($37 million at December 31, 2009).

NON-CONTROLLING INTERESTSNon-controlling interests include participating account surplus in subsidiaries and preferred shares issued bysubsidiaries to third parties.

SHARE CAPITAL AND SURPLUSDuring the six months ended June 30, 2010, no common shares were purchased for cancellation pursuant to theCompany’s Normal Course Issuer Bid. Under the Company’s Stock Option Plan, 2,826,925 shares were issued fora total value of $39 million or $13.52 per share.

On March 4, 2010 the Company issued 6,000,000 5.80% Non-Cumulative First Preferred Shares, Series M, whichare perpetual in nature, with an aggregate stated value of $150 million.

On March 31, 2010 the Company redeemed all of the 7,938,500 4.70% Non-Cumulative First Preferred Shares,Series D for $25.25 per share. As a result, the Company no longer has any outstanding preferred shares classifiedas liabilities.

14



GR

EA

T-WEST LIFEC

O IN

C.


During the six months ended June 30, 2010, the Company paid dividends of $0.615 per common share for a totalof $583 million and perpetual preferred share dividends of $42 million.

Unrealized foreign exchange losses on translation of the net investment in foreign operations decreased surplus by$233 million since December 31, 2009.

LIQUIDITY AND CAPITAL MANAGEMENT AND ADEQUACY

LIQUIDITYThe Company’s liquidity requirements are largely self-funded, with short term obligations being met by generatinginternal funds and maintaining adequate levels of liquid investments. At June 30, 2010, Lifeco held cash andgovernment short term investments of $4.3 billion ($5.7 billion at December 31, 2009). This includes approximately$1.0 billion ($1.0 billion at December 31, 2009) held directly at the holding company level and other marketablesecurities. In addition, Lifeco and its operating subsidiaries held government bonds of $20.4 billion ($17.9 billion atDecember 31, 2009).

Dividends on outstanding common shares of the Company are declared and paid at the sole discretion of theBoard of Directors of the Company. The decision to declare a dividend on the common shares of the Companytakes into account a variety of factors including the level of earnings, adequacy of capital, and availability of cashresources. As a holding company, the Company’s ability to pay dividends is dependent upon the Companyreceiving dividends from its operating subsidiaries. The Company’s operating subsidiaries are subject to regulationin a number of jurisdictions, each of which maintains its own regime for determining the amount of capital that mustbe held in connection with the different businesses carried on by the operating subsidiaries. The requirementsimposed by the regulators in any jurisdiction may change from time to time, and thereby impact the ability of theoperating subsidiaries to pay dividends to the Company.

CASH FLOWS

Cash flowsFor the three months ended

June 30For the six months ended

June 302010 2009 2010 2009

Cash flows relating to the following activities:Operations $ 1,317 $ 1,067 $ 2,514 $ 1,822Financing (297) (252) (513) (461)Investment (1,389) (451) (2,324) (895)

(369) 364 (323) 466Effects of changes in exchange rates on cash and

cash equivalents 50 14 (186) 41Increase (decrease) in cash and cash equivalents in

the period (319) 378 (509) 507Cash and cash equivalents from continuing

operations, beginning of period 3,237 2,979 3,427 2,850Cash and cash equivalents from continuing

operations, end of period $ 2,918 $ 3,357 $ 2,918 $ 3,357

The principal source of funds for the Company, on a consolidated basis, is cash provided by operating activities,including premium income, net investment income and fee income. In general, these funds are used primarily topay policy benefits, policyholder dividends and claims, as well as operating expenses and commissions. Cashflows generated by operations are mainly invested to support future liability cash requirements. Financing activitiesinclude the issuance and repayment of capital instruments, and associated dividends and interest payments.

15



GR

EA

T-W

EST

LIFE

CO

INC

.


In the quarter, cash and cash equivalents decreased by $319 million from March 31, 2010. Cash flows provided byoperations during the second quarter of 2010 were $1,317 million, an increase of $250 million compared to thesecond quarter of 2009. For the three months ended June 30, 2010, cash flows were used by the Company toacquire an additional $1,389 million of investment assets, and $314 million of cash was utilized to pay dividends tothe preferred and common shareholders.

For the six months ended June 30, 2010, cash and cash equivalents decreased by $509 million from December 31,2009. Cash flows provided from operations were $2,514 million, an increase of $692 million compared to 2009. In2010, cash flows were used by the Company to acquire an additional $2,324 million of investment assets, and$625 million of cash was utilized to pay dividends to the preferred and common shareholders.

COMMITMENTS/CONTRACTUAL OBLIGATIONSCommitments/contractual obligations have not changed materially from December 31, 2009.

CAPITAL MANAGEMENT AND ADEQUACYIn Canada, The Office of the Superintendent of Financial Institutions (OSFI) has established a capital adequacymeasurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and theirsubsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). The targetoperating range of the MCCSR ratio for its operating subsidiaries is 175% to 200% (on a consolidated basis).

Great-West Life’s MCCSR ratio at June 30, 2010 was 202% (204% at December 31, 2009). The MCCSR ratioincludes no impact from approximately $1.0 billion of cash at the holding company level, accumulated mainly as aresult of a series of capital issuance, redemptions and buy back activities since the third quarter of 2008. LondonLife’s MCCSR ratio at June 30, 2010 was 216% (239% at December 31, 2009). Canada Life's MCCSR ratio atJune 30, 2010 was 210% (210% at December 31, 2009).

OSFI continues to update and amend the MCCSR guideline in response to emerging issues. The capitalrequirements for segregated fund guarantees were amended in 2008 and the Company expects that therequirements will increase for new business issued after December 31, 2010. The extent of the increase inrequirements has not been finalized and discussions with OSFI are on-going. The Company expects furtherchanges in segregated fund guarantee requirements, likely in 2013, that will impact its existing business. Theimpact of these further changes is uncertain.

At December 31, 2009, the Risk Based Capital ratio (RBC) of GWL&A, Lifeco's regulated U.S. operating companywas 476% of the Company Action Level set by the National Association of Insurance Commissioners. GWL&Areports its RBC ratio annually to U.S. insurance regulators.

16



GR

EA

T-WEST LIFEC

O IN

C.


RATINGS The Company and its major operating subsidiaries continue to hold strong ratings. The ratings, as outlined below,and outlook from the five rating agencies that rate the Company and certain of its subsidiaries have not changedduring 2010. The ratings outlined below have been affirmed with a stable outlook by A.M. Best Company on June22, 2010 and Moody's Investors Service on July 19, 2010.

Rating agency MeasurementLifeco

Great-West

LondonLife

CanadaLife GWL&A

A.M. Best Company Financial Strength A+ A+ A+ A+DBRS Limited Claims Paying Ability

Senior DebtSubordinated Debt

AA (low)IC-1 IC-1 IC-1

AA (low)

NR

Fitch Ratings Insurer Financial Strength AA+ AA+ AA+ AA+Moody's Investors Service Insurance Financial Strength Aa3 Aa3 Aa3 Aa3Standard & Poor's Ratings Services Insurer Financial Strength

Senior DebtSubordinated Debt

A+AA AA AA

AA-

AA

RISK MANAGEMENT AND CONTROL PRACTICESInsurance companies are in the business of assessing, structuring, pricing and assuming, and managing risk. Thetypes of risks are many and varied, and will be influenced by factors both internal and external to the businessesoperated by the insurer. These risks, and the control practices used to manage the risks, are discussed in detail inthe 2009 Annual MD&A and have not substantially changed.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTSThere were no major changes to the Company’s and its subsidiaries’ policies and procedures with respect to theuse of derivative financial instruments in 2010. During the six month period ended June 30, 2010, the outstandingnotional amount of derivative contracts increased by $345 million. The exposure to credit risk, which is limited tothe current fair value of those instruments which are in a gain position, decreased to $685 million at June 30, 2010from $717 million at December 31, 2009.

ACCOUNTING POLICIES

FUTURE ACCOUNTING POLICIES

International Financial Reporting Standards – In February 2008, the Canadian Institute of CharteredAccountants (CICA) announced that Canadian GAAP for publicly accountable enterprises will be replaced byInternational Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. TheCompany will be required to begin reporting under IFRS for the quarter ending March 31, 2011 and will be requiredto prepare an opening balance sheet and provide information that conforms to IFRS for comparative periodspresented.

The Company has developed an IFRS changeover plan which will address key areas such as accounting policies,financial reporting, disclosure controls and procedures, information systems, education and training and otherbusiness activities. Until this effort is complete, the impact of adopting IFRS and the related effects on theCompany’s consolidated financial statements cannot be reasonably determined.

The Company is in the process of assessing and preparing to implement changes to accounting policies resultingfrom the transition to IFRS. The following list, though not exhaustive, identifies changes in key accounting policiesdue to the adoption of IFRS.

17



GR

EA

T-W

EST

LIFE

CO

INC

.


• Policyholder and reinsurance contract liabilities will be classified as insurance, investment or servicecontracts as required by IFRS 4, IAS 39 and IAS 18. A review of existing contracts as at December 31,2009 suggests that a majority of contracts will be classified as insurance contracts which continue to bemeasured using the Canadian Asset Liability Method (CALM) under IFRS. Investment contracts will beaccounted for either at fair value or at amortized cost. Reinsurance accounts will be presented on theConsolidated Balance Sheets and in the Summaries of Consolidated Operations on a gross basis.

• Certain deferred acquisition costs relating to investment contract liabilities may not meet the criteria fordeferral and will be expensed as incurred within the Summaries of Consolidated Operations and thebalance of deferred acquisition costs on in-force contracts will be adjusted in the opening ConsolidatedBalance Sheets. The remaining balance of deferred acquisition costs will be reclassified from policyholdercontract liabilities and presented as assets in the Consolidated Balance Sheets.

• The assets and liabilities of segregated funds will be included within the Consolidated Balance Sheets as asingle line on each side of the Company’s balance sheet measured at fair value.

• Real estate properties have been classified between owner occupied and investment properties. Theclassification between the two categories will result in a change in measurement in the value of real estate.At transition, owner occupied property will be measured at fair value as its deemed cost, while aftertransition the cost model will be used to value such properties. Depreciation expense on owner occupiedproperties will be expensed within the Summaries of Consolidated Operations. Investment properties willbe measured at fair value at transition and thereafter under IFRS.

• The Company is monitoring developments in the IFRS standards relating to employee benefits and isconsidering its options on transition to IFRS as well as post conversion at this time.

• The Company is assessing its future income tax assets and liabilities in connection with any adjustmentsarising from the transition to IFRS.

Adoption of IFRS requires that the IFRS standards be applied on a retroactive basis with the exception of thoseexempted under IFRS. Any changes to existing standards must be applied retroactively and reflected in theopening balance sheet of the comparative period. There are a number of exemptions from full restatementavailable under IFRS. While the Company continues to evaluate its options on transition, it does expect to elect theone-time option to reset the cumulative translation account to zero upon adoption of IFRS. The Company alsodoes not expect to restate prior business combinations due to the complexities involved in obtaining historicalvaluations and will instead apply the IFRS requirements prospectively.

The Company acknowledges that the above anticipated changes in accounting policy are not an exhaustive list ofall possible significant items that will occur upon the transition to IFRS. The Company will continue to monitordevelopments in and interpretations of standards as well as industry practices and may change accounting policiesdescribed in the above paragraphs.

The Company’s IFRS changeover plan includes the modification of internal controls over financial reporting forchanges in accounting policy arising from the transition to IFRS and the education of key stakeholders including theBoard of Directors, management and employees. The impact on the Company’s information technology, datasystems and processes will be dependent upon the magnitude of change resulting from these and other items. Atthis time, no significant impact on information or data systems has been identified and the Company does notexpect to make changes which will materially affect internal controls over financial reporting.

OSFI has reaffirmed its preliminary position in October 2009 that early adoption of IFRS standards with effectivedates after 2011 should not be permitted for Federally Regulated Entities (FREs) to ensure financial statements arematerially comparable for regulatory monitoring purposes. As part of the Company’s IFRS transition project, theCompany is continuing to monitor the expected effect on regulatory capital requirements.

18



GR

EA

T-WEST LIFEC

O IN

C.


The Company continues to monitor the potential changes proposed by the International Accounting StandardsBoard (IASB) and considers the impact changes in the standards would have on the Company’s operations. InNovember 2009, the IASB issued IFRS 9 to amend how financial instruments are classified and measured. Thestandard is effective for annual periods beginning on or after January 1, 2013. The Company is analyzing theimpact the new standard will have on its financial assets and liabilities.

On July 30, 2010 the IASB published for comment an exposure draft proposing changes to the accountingstandard for insurance contracts. The exposure draft is open for comment until November 30, 2010 and a finalaccounting standard is not expected to be implemented for several years. The Company will continue to measureinsurance liabilities using CALM until such time when a new IFRS standard for insurance contract measurement isissued. OSFI is expected to make changes within the MCCSR regulatory capital regime when the new IFRSstandard for insurance contract measurement is issued. Consequently, the evolving nature of IFRS will likely resultin additional accounting and regulatory capital changes, some of which may be significant, in the years followingthe Company’s initial transition to IFRS.

The Company is monitoring the potential impact of other changes to financial reporting processes, disclosurecontrols and procedures, and internal controls over financial reporting. The Company has commenced a parallelrun to capture IFRS comparative information for fiscal 2010 to quantify the effects of the potential significantdifferences between IFRS and Canadian GAAP which may or may not be material. As the implications of theconversion are identified, continual requirements for infrastructure, expertise, training and education will beassessed. The Company will continue to assess the impact of adopting IFRS, and will update its MD&Adisclosures quarterly to report on the progress of its IFRS changeover plan.

SEGMENTED OPERATING RESULTS

The consolidated operating results of Lifeco include the operating results of Great-West Life, London Life, CanadaLife, GWL&A, and Putnam.

For reporting purposes, the consolidated operating results are grouped into four reportable segments, Canada,United States, Europe, and Lifeco Corporate reflecting geographic lines as well as the management and corporatestructure of the companies.

CANADAThe Canada segment of Lifeco includes the operating results of the Canadian businesses operated by Great-WestLife, London Life, and Canada Life.

Selected consolidated financial information - CanadaFor the three months ended For the six months ended

June 302010

March 31 2010

June 302009

June 30 2010

June 30 2009

Premiums and deposits $ 4,652 $ 4,852 $ 4,822 $ 9,504 $ 9,087Sales 2,285 2,674 2,432 4,959 4,217Fee and other income 255 256 229 511 451Net earnings - common shareholders 237 233 217 470 425

Total assets $ 58,034 $ 57,018 $ 53,949Segregated funds net assets 44,867 46,135 41,271Proprietary mutual funds net assets 2,829 2,943 2,498Total assets under management 105,730 106,096 97,718Other assets under administration 10,858 11,010 10,524Total assets under administration $ 116,588 $ 117,106 $ 108,242

19



GR

EA

T-W

EST

LIFE

CO

INC

.


BUSINESS UNITS – CANADA

Net earnings for Canada are up 9% compared to the second quarter of 2009 and up 11% over the six month periodof 2009. Premiums and deposits and sales are up in Canada compared to the second quarter of 2009 afteradjusting the 2009 second quarter results for the impact of the Fidelity Investments of Canada ULC (Fidelity)transaction. The second quarter results for 2009 include $625 million of premiums and deposits and salesassociated with the Fidelity transaction.

INDIVIDUAL INSURANCE & INVESTMENT PRODUCTS 2010 DEVELOPMENTS• Premiums and deposits for all individual product categories increased significantly during the first six months of

2010 compared to the prior year; life insurance 6%, living benefits 3%, retail proprietary funds 22% and retailguaranteed interest rate products 26%.

• Sales of proprietary retail investment funds and payout annuity products increased 49% and 122% respectivelycompared to the six month period of 2009. Sales of Individual Life products were 32% higher than 2009.

• Net earnings for the first six months of 2010 were 13% higher than the same period in 2009.• Year to date net cash flow into proprietary retail investment funds was 1.4% of opening assets, exceeding the

industry result of 0.5% as reported by IFIC.• While the suspension on withdrawals and transfers from the Real Estate Segregated Funds of Great-West Life,

London Life and Canada Life remains in place, Great-West Life and Canada Life processed an initial paymentfor those unitholders who made a request effective July 9, 2010, at the unit value on that day. London Lifeannounced an expected second payout for the fall of 2010.

OPERATING RESULTS

For the three months ended For the six months endedJune 30

2010March 31,

2010June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 2,920 $ 3,134 $ 3,140 $ 6,054 $ 5,750Sales 2,208 2,470 2,332 4,678 3,991Fee and other income 211 209 186 420 360Net earnings 165 159 160 324 287

Premiums and depositsIndividual Life premiums for the quarter increased $47 million compared with the same quarter last year. Theincrease was primarily due to continued strong persistency and sales. For Living Benefits, premiums for the quarterincreased $3 million compared with last year. The increase was primarily due to new sales and strong persistency.Premiums and deposits to proprietary retail investment funds for the quarter increased $116 million compared withlast year, primarily due to the launch of new segregated funds products in the fourth quarter of 2009 and improvedequity markets. Premiums and deposits to retail guaranteed interest rate and payout annuity products for thequarter decreased $33 million compared with last year, with a 34% decrease in guaranteed savings and a 63%increase in payout annuities. Guaranteed savings premiums declined due to an increased emphasis on equityinvestments. Premiums and deposits to group retirement products increased $272 million, after adjusting for thesecond quarter 2009 Fidelity transaction. The second quarter results for 2009 include $625 million of initial lump-sum transfers from the Fidelity transaction which impacted both premiums and deposits and sales.

For the six months ended June 30, 2010, Individual Life premiums increased $87 million to $1,508 millioncompared to the same period last year. Living Benefits premiums increased $4 million compared to the sameperiod last year, primarily due to new sales and strong persistency. Premiums and deposits to proprietary retailinvestment funds increased $312 million year to date compared with last year, for the same reasons as the inquarter period compared to 2009. Premiums and deposits to retail guaranteed interest rate and payout annuity

20



GR

EA

T-WEST LIFEC

O IN

C.


products increased $84 million year to date compared with last year, due to the competitive pricing strategyintroduced in mid-March 2009. Premiums and deposits to group retirement products increased $442 millioncompared with last year, after adjusting for the Fidelity transaction of $625 million.

Individual Life premiums increased $50 million compared with the previous quarter reflecting continued stronggrowth in sales of participating life insurance and the seasonality of premiums received from inforce participatinglife insurance policies. For Living Benefits, premiums and deposits increased $3 million compared with the previousquarter, primarily due to higher new sales and stronger persistency. Premiums and deposits to proprietary retailinvestment funds decreased $151 million compared with the previous quarter, primarily due to RRSP season.Premiums and deposits to retail guaranteed interest rate and payout annuity products decreased $73 millioncompared with the previous quarter, primarily due to an increased emphasis on equity investments. Premiums anddeposits to group retirement products decreased $43 million compared with the previous quarter, primarily due toRRSP season.

SalesFor the quarter, Individual Life sales increased $18 million compared with the same quarter last year, due to strongsales of all Individual Life insurance products. Living Benefits sales increased $1 million compared with last year,primarily due to higher critical illness sales. In the quarter, sales of proprietary retail investment funds increased$334 million and sales of retail guaranteed interest rate and payout annuity products decreased $39 millioncompared to 2009. Sales of group retirement products increased $160 million from 2009, after adjusting for theinitial lump-sum transfers of $625 million in the second quarter of 2009 resulting from the Fidelity transaction.

For the six months ended June 30, 2010, Individual Life sales increased $41 million compared to the same periodlast year, primarily due to a $22 million increase in participating life insurance sales. Sales of Living Benefitsincreased $2 million compared to the same period last year, primarily due to higher critical illness sales. Year todate, sales of proprietary retail investment funds increased $820 million and sales of retail guaranteed interest rateand payout annuity products increased $86 million compared to 2009. Sales of group retirement productsincreased $300 million from the same period as last year, after adjusting for initial lump-sum transfers of $625million from the Fidelity transaction.

Individual Life sales increased $7 million compared with the previous quarter primarily due to continued growth inparticipating life insurance sales. For Living Benefits, sales increased $1 million compared with the previousquarter, primarily due to higher disability insurance sales. In the quarter, sales of proprietary retail investment fundsdecreased $283 million and sales of retail guaranteed interest rate and payout annuity products decreased $88million compared to the previous quarter due to RRSP season. Sales of group retirement products increased by$151 million from the previous quarter.

Fee and other incomeFee and other income for the quarter increased $25 million compared with last year, primarily due to the increase inaverage proprietary investment fund assets of 17%.

For the six months ended June 30, 2010, fee and other income increased $60 million compared to the same periodlast year, primarily due to the increase in average proprietary investment fund assets of 20%.

Fee and other income increased $2 million compared with the previous quarter. Net earningsNet earnings for the quarter increased $5 million compared with last year, primarily due to increased fee income,higher actuarial basis changes and growth in mortality and morbidity gains partially offset by higher IndividualLife new business strain and lower investment gains.

21



GR

EA

T-W

EST

LIFE

CO

INC

.


For the six months ended June 30, 2010, net earnings increased $37 million compared to the same period lastyear. The increase was primarily due to higher fee income, growth in mortality and morbidity gains and increasedactuarial basis changes reduced by higher Individual Life new business strain.

Net earnings increased $6 million compared with the previous quarter. This is primarily due to higher investmentgains and increased actuarial basis changes offset by higher Individual Life new business strain. Net earnings attributable to the participating account were $20 million in 2010, compared with net earnings of $8million in 2009. For the six months ended June 30, 2010, net earnings attributable to the participating accountwere $15 million compared with net earnings of $23 million for the same period in 2009. Net earnings attributableto the participating account increased by $25 million from the first quarter of 2010.

GROUP INSURANCE

2010 DEVELOPMENTS• Premiums and deposits grew by 3% for the six months ended June 30, 2010 compared to 2009.• Sales of $281 million for the six months ended June 30, 2010 increased by 24% compared to 2009.• Net earnings were $189 million for the six months ended June 30, 2010, a decrease of 5% compared to 2009.• In the second quarter, the Company launched Prelude, a voluntary, individually funded Retiree Health product in

response to plan sponsor interest in alternatives to employer paid, defined benefit Retiree plans.• The Canada Life Direct Marketing area was successful in acquiring a large national firm as a client. Over the

next few years, this acquisition is expected to significantly expand the size, scope and capabilities of the DirectMarketing business unit.

OPERATING RESULTS


2010March 31

2010June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 1,732 $ 1,718 $ 1,682 $ 3,450 $ 3,337Sales 77 204 100 281 226Fee and other income 37 37 35 74 72Net earnings 97 92 106 189 199

Premiums and depositsPremiums and deposits for the quarter increased $50 million compared with last year, primarily due to a 3%increase in large case premiums and deposits.

For the six months ended June 30, 2010, premiums and deposits increased $113 million compared to 2009,primarily due to a 5% increase in large case premiums and deposits.

Premiums and deposits increased $14 million compared with the previous quarter, primarily due to a 1% increasein large case premiums and deposits.

SalesFor the quarter, sales decreased $23 million compared with last year, primarily due to lower sales in the large casemarket from a lower number of new sales.

For the six months ended June 30, 2010, sales increased $55 million compared to 2009, primarily due to highersales in the large case market from seven large case sales for $114 million in 2010 compared to three large casesales for $32 million in 2009, partly offset by lower activity sales.

22



GR

EA

T-WEST LIFEC

O IN

C.


Sales decreased $127 million compared with the previous quarter, primarily due to lower sales in the large casemarket as there was one large case sale for $5 million in the current quarter compared to $109 million of large casesales in the previous quarter, as well as a lower number of new sales compared to the previous quarter.

Fee and other incomeFee and other income is derived primarily from ASO contracts, whereby the Company provides group insurancebenefit plan administration on a cost-plus basis.

For the three month and six month periods ended June 30, 2010, fee and other income increased $2 millioncompared to the same periods in 2009, primarily due to higher claims volumes. Compared to the previous quarter,fee and other income remained at the same level.

Net earningsNet earnings for the quarter decreased $9 million compared with last year. The results reflect lower investmenttrading gains, partly offset by a higher gain from actuarial reserve basis changes.

For the six months ended June 30, 2010, net earnings decreased $10 million compared to the same period lastyear. The results reflect lower investment trading gains, a decrease in group health experience on long termdisability cases and group health morbidity experience in the medical and dental sublines, partly offset by a highergain from actuarial reserve basis changes.

Net earnings increased $5 million compared with the previous quarter, primarily due to improved group healthexperience on long term disability cases and an increase in group life mortality experience from improved claimsexperience partly offset by a lower gain from actuarial reserve basis changes. CANADA CORPORATECanada Corporate consists of items not associated directly with, or allocated to the Canadian business units.

Canada Corporate reported a net loss for the quarter of $25 million, compared with a reported net loss of $49million in the second quarter of 2009. The reduction in net loss is primarily due to fair value loss adjustments in2009 on two series of Lifeco Preferred Shares, Series D and Series E, partly offset by increased financing costs.The Lifeco Preferred Shares Series D and Series E were redeemed on March 31, 2010 and December 31, 2009,respectively.

For the six months ended June 30, 2010, Canada Corporate reported a net loss of $43 million compared with a netloss of $61 million for the same period in 2009. The reduction in net loss is primarily due to the same reasons asthe in quarter period compared to 2009.

Compared to the previous quarter, net earnings decreased $7 million primarily due to higher financing costs.

23



GR

EA

T-W

EST

LIFE

CO

INC

.


UNITED STATESThe United States operating results for Lifeco include the results of GWL&A, Putnam, and the results of theinsurance businesses in the United States branches of Great-West Life and Canada Life, together with anallocation of a portion of Lifeco's corporate results.

Selected consolidated financial information - United StatesFor the three months ended For the six months ended

June 302010

March 31 2010

June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 7,303 $ 7,756 $ 6,180 $ 15,059 $ 14,162Sales 6,826 11,620 6,211 18,446 14,385Fee and other income 307 317 291 624 574Net earnings - common shareholders 54 68 49 122 124Net earnings - common shareholders (US$) 53 65 42 118 102

Total assets $ 30,900 $ 28,947 $ 31,054Segregated funds net assets 20,378 19,547 19,034Proprietary mutual funds and institutional

net assets 116,240 120,722 119,231Total assets under management 167,518 169,216 169,319Other assets under administration 111,822 114,217 94,700Total assets under administration $ 279,340 $ 283,433 $ 264,019

BUSINESS UNITS – UNITED STATES

In the second quarter, comparing 2010 to 2009, the Canadian dollar strengthened against the US dollar. As aresult of currency movement, net earnings were negatively impacted by $7 million compared to the second quarterof 2009 and $21 million compared to the first six months of 2009.

FINANCIAL SERVICES

2010 DEVELOPMENTS• Premiums and deposits increased US$385 million in 2010 compared to the six months ended June 30, 2009.• Sales have improved significantly for the six months ended June 30, 2010 compared to the same period last

year in both the Retirement Services and Individual Markets segments.• For the six months ended June 30, 2010, 401(k) sales were 1,043 plans compared to 678 plans for the same

period of 2009, an increase of 54%.• Single Premium Life sales increased to US$160 million in 2010 compared to US$44 million in the previous year.

Sales in the business-owned life insurance (BOLI) product increased to US$180 million in 2010 from US$72million in 2009.

• Net earnings for the six months ended June 30, 2010 were US$158 million, an increase of 16% from the sameperiod in 2009.

24



GR

EA

T-WEST LIFEC

O IN

C.


OPERATING RESULTS


2010March 31

2010June 30 2009

June 30 2010

June 30 2009


Premiums and deposits (US$) $ 1,999 $ 1,687 $ 1,014 $ 3,686 $ 3,301Sales (US$) 1,535 5,403 1,040 6,938 3,481Fee and other income (US$) 108 107 88 215 169Net earnings (US$) 79 79 67 158 136

Premiums and depositsPremiums and deposits increased for the three months ended June 30, 2010 by US$985 million compared to 2009due a large transfer from retail investment options to segregated funds by one Retirement Services plan.

For the six months ended June 30, 2010, premiums and deposits increased by US$385 million compared to 2009primarily due to Individual Markets sales.

Premiums and deposits increased from the previous quarter, due to the large transfer from retail investmentoptions to segregated funds by one Retirement Services plan.

SalesFor the three and six months ended June 30, 2010, sales increased by US$495 million and US$3,457 million,respectively, compared to the same period last year, primarily due to higher plan sales in Retirement Services andIndividual Market sales.

Sales decreased US$3,868 million compared with the previous quarter, primarily due to a large sale in the publicnon-profit market in Retirement Services in the first quarter of 2010.

Fee and other incomeFee and other income for the quarter increased US$20 million compared with last year, primarily due to higheraverage asset levels from improved U.S. equity markets.

For the six months ended June 30, 2010, fee and other income increased US$46 million compared to the sameperiod last year, primarily due to higher average asset levels from improved U.S. equity markets.

Fee and other income was at the same level compared with the previous quarter.

Net earningsNet earnings for the quarter increased US$12 million compared with last year, primarily due to higher fee incomeand a basis change reducing the best estimate mortality assumption on assumed reinsurance in 2010, partiallyoffset by higher expenses in Retirement Services.

For the six months ended June 30, 2010, net earnings increased US$22 million compared to the same period lastyear. The increase was primarily due to higher fees and a basis change reducing the best estimate mortalityassumption partially offset by higher expenses.

Net earnings were at the same level as the previous quarter.

25



GR

EA

T-W

EST

LIFE

CO

INC

.


ASSET MANAGEMENT

2010 DEVELOPMENTS• For the six months ended June 30, 2010, premiums and deposits increased US$2.5 billion compared to the

same period last year.• Putnam's suite of absolute return mutual funds, launched publicly on January 13, 2009, has reached US$2.1

billion in assets under management (AUM) as of June 30, 2010. During the second quarter Putnam announcedthat it will be launching a suite of three U.S. Multi-Cap Equity Funds to provide investors with an approach toinvesting by style - value, core/blend, growth - regardless of the market capitalization of the underlyingsecurities.

• For the six months ended June 30, 2010, Putnam's net loss was US$41 million, an improvement of 40% fromthe same period in 2009, adjusting for the US$33 million gain from the sale of Union PanAgora in 2009.

• For the six months ended June 30, 2010, the impact of improved equity markets on fee income in AssetManagement positively impacted net earnings by US$42 million after-tax compared to the same period in 2009.

• In May, Putnam announced it would transition away from its current exclusive work in 529 College SavingsPlans, and actively seek opportunities to serve the broader college savings market nationwide.

OPERATING RESULTS


2010March 31

2010June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 5,245 $ 6,001 $ 4,994 $ 11,246 $ 10,117Fee and other income

Investment management fees 134 142 126 276 247Service fees 42 44 47 86 94Underwriting and distribution fees 18 19 13 37 26

Fee and other income 194 205 186 399 367Net earnings (28) (15) (31) (43) (42)

Premiums and deposits (US$) $ 5,092 $ 5,770 $ 4,268 $ 10,862 $ 8,366Fee and other income (US$)

Investment management fees (US$) 130 137 108 267 205Service fees (US$) 41 42 40 83 78Underwriting & distribution fees (US$) 17 18 11 35 21

Fee and other income (US$) 188 197 159 385 304Net earnings (US$) (26) (15) (26) (41) (35)

Premiums and depositsFor the three and six months ended June 30, 2010, premiums and deposits increased US$824 million andUS$2,496 million, respectively, compared to the same periods of 2009, due to an increase in sales as a result ofimproved economic conditions and investment performance, and the introduction of new products.

Premiums and deposits decreased US$678 million compared with the previous quarter, primarily due to the timingof funding of institutional mandates.

Fee and other incomeRevenue is derived primarily from investment management fees, transfer agency and other shareholder servicefees and underwriting and distribution fees. Generally, fees are earned based on average AUM and may dependon financial markets, the relative performance of Putnam’s investment products, and the number of retailshareholder accounts or sales.

26



GR

EA

T-WEST LIFEC

O IN

C.


Fee and other income for the quarter increased US$29 million compared with last year. The increase was primarilydue to an increase in asset-based fees from higher average AUM. Average AUM increased 13% from 2009 duemainly to higher average equity market levels and improved investment performance.

For the six months ended June 30, 2010, fee and other income increased US$81 million compared to the sameperiod last year for the same reasons as the in quarter period compared to 2009.

Fee and other income decreased US$9 million compared with the previous quarter, primarily due to lowerperformance fees earned in the quarter.

Net earningsNet earnings for the quarter were at the same level compared with last year as higher revenue was offset primarilyby increased expenses as a result of the timing of incentive compensation accruals, lower tax benefits and higherdilution losses related to Putnam share repurchases.

For the six months ended June 30, 2010, net earnings increased US$27 million compared to the same period lastyear excluding the US$33 million net gain in 2009 on the sale of Union PanAgora. This increase was primarily dueto higher fee and investment income in 2010 due to improved performance and economic conditions which resultedin higher average AUM.

Net earnings decreased US$11 million compared with the previous quarter, primarily due to lower performancebased fee revenue and investment income.

ASSETS UNDER MANAGEMENT

Assets under management(US$ millions)


2010March 31

2010June 30 2009

June 30 2010

June 30 2009

Beginning assets $ 118,355 $ 114,946 $ 98,555 $ 114,946 $ 105,697Sales (includes dividends reinvested) 5,092 5,770 4,268 10,862 8,366Redemptions (6,179) (5,896) (13,024) (12,075) (19,873)

Net asset flows (1,087) (126) (8,756) (1,213) (11,507)Impact of market/performance (7,607) 3,535 12,986 (4,072) 8,595

Ending assets $ 109,661 $ 118,355 $ 102,785 $ 109,661 $ 102,785

Average assets under management $ 114,971 $ 115,450 $ 101,472 $ 115,207 $ 100,580

Average AUM for the three months ended June 30, 2010 were US$115.0 billion as follows: mutual funds US$63.1billion and institutional accounts US$51.9 billion. Average AUM increased by US$13.5 billion compared to the threemonths ended June 30, 2009 primarily due to the positive impact of market/performance, offset by net redemptions.

Average AUM for the six months ended June 30, 2010 increased by US$14.6 billion compared to the six monthsended June 30, 2009 for the same reasons as the in quarter period compared to 2009.

Compared to the first quarter, average AUM decreased by US$479 million reflecting volatility in global equitymarkets during the quarter.

27



GR

EA

T-W

EST

LIFE

CO

INC

.


UNITED STATES CORPORATECorporate net earnings for the three and six month period ending June 30, 2010 were nil and US$1 million,respectively, compared with US$1 million for the same periods in 2009. Net earnings decreased US$1 millioncompared with the previous quarter, primarily due to increased expenses on corporate initiatives.

EUROPEThe Europe segment is comprised of two distinct business units: Insurance & Annuities, with operations in theUnited Kingdom, Isle of Man, Ireland, and Germany; and Reinsurance, which operates primarily in the UnitedStates, Barbados and Ireland. Insurance & Annuities, which offers protection and wealth management productsincluding payout annuity products, is conducted through Canada Life and its subsidiaries. The Reinsurancebusiness is conducted through Canada Life, London Life, London Reinsurance Group Inc. (LRG), and theirsubsidiaries.

Selected consolidated financial information - EuropeFor the three months ended For the six months ended

June 302010

March 31 2010

June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 2,274 $ 2,358 $ 2,963 $ 4,632 $ 5,277Sales 1,097 1,090 1,376 2,187 2,171Fee and other income 156 163 146 319 321Net earnings - common shareholders 142 140 149 282 197

Total assets $ 42,386 $ 40,877 $ 46,641Segregated funds net assets 21,778 21,667 22,887Total assets under management 64,164 62,544 69,528Other assets under administration 98 102 117Total assets under administration $ 64,262 $ 62,646 $ 69,645

2010 DEVELOPMENTS • Premiums and deposits in the U.K. and Isle of Man increased by 12% in local currency, compared to the six

months ended June 30, 2009.• For the six months, growth in sales of single premium savings products in the Isle of Man continued with an

increase of 173% in local currency, compared to the prior year.• Net earnings for the six months ended June 30, 2010 were $282 million, an increase of 43% from the same

period in 2009.• Recent mortality experience in the U.K. payout annuity business was favourable relative to 2009, contributing to

earnings growth.• Canada Life has been awarded a 5 Star Online Service Award in the Investment Provider & Packager category

at the Financial Adviser Online Service awards in the U.K.• The second quarter 2010 Asscompact Trends surveyed German independent brokers and selected Canada Life

as the market leader in the variable annuities category. The variable annuity GMWB product was launched inGermany in 2009.

28



GR

EA

T-WEST LIFEC

O IN

C.


BUSINESS UNITS – EUROPE

In the second quarter, comparing 2010 to 2009, the Canadian dollar strengthened against the euro, the US dollarand the British pound. As a result of currency movement, net earnings were negatively impacted by $26 millioncompared to the second quarter of 2009 and $43 million compared to the first six months of 2009.

INSURANCE & ANNUITIES

OPERATING RESULTS


2010March 31

2010June 30 2009

June 30 2010

June 30 2009


Premiums and depositsPremiums and deposits for the quarter decreased $458 million compared with last year. The decrease wasprimarily due to currency movement and lower sales of onshore savings and payout annuity products in the U.K.The decrease was partly offset by sales of single premium savings products in the Isle of Man due primarily to largecases (which vary from quarter to quarter), competitive pricing and continued sales momentum.

For the six months ended June 30, 2010, premiums and deposits decreased $131 million compared to the sameperiod last year. The decrease was primarily due to lower sales of onshore savings products in the U.K andpension products in Ireland as well as currency movement. The decrease was partly offset by the strong sales ofsingle premium savings products in the Isle of Man, higher payout annuity sales in the U.K., and growth fromGermany’s variable annuity GMWB product.

Premiums and deposits decreased $82 million compared with the previous quarter, primarily due to lower sales ofpayout annuity products in the U.K and currency movement. The decrease was partly offset by higher sales ofsingle premium savings products in the Isle of Man, pension sales in Ireland, and group insurance and pensionsales in the U.K.

SalesFor the quarter, sales decreased $279 million compared with last year, primarily due to currency movement andlower sales of payout annuities from heightened competition and a decrease in onshore single premium savingsproducts. These decreases were partly offset by sales of single premium savings products in the Isle of Man.

For the six months ended June 30, 2010, sales increased $16 million compared to the same period last year. Theincrease is largely due to higher sales of single premium savings products in the Isle of Man. Sales also increaseddue to growth of payout annuities in the U.K. as first quarter results were very strong. Sales were also positivelyimpacted by Germany’s variable annuity GMWB product. Partly mitigating these increases were unfavourablecurrency movement and lower sales of onshore savings products.

Sales increased $7 million compared with the previous quarter, primarily due to strong sales of single premiumsavings products in the Isle of Man and higher pension sales in Ireland. These increases were partly offset by thelower sales of payout annuity products in the U.K. and currency movement.

29



GR

EA

T-W

EST

LIFE

CO

INC

.


Fee and other incomeFor the three months ended June 30, 2010, fee and other income increased $6 million compared with last year.The increase was primarily due to higher level of surrender charges and a sales mix shift in the U.K. partly offset bycurrency movement.

For the six months ended June 30, 2010, fee and other income decreased $4 million compared to the same periodlast year. The decrease was primarily due to currency movement as well as lower fees in Ireland and Germany,partly offset by higher surrender charges in the U.K.

Fee and other income decreased $5 million compared with the previous quarter primarily due to currencymovement, partially offset by a higher level of surrender charges in the U.K.

Net earningsFor the three months ended June 30, 2010, net earnings for the quarter increased $25 million compared with lastyear. In 2009, net earnings were reduced due to charges for future credit losses in actuarial liabilities andinvestment impairments. The increase also includes improved mortality results, higher investment gains and assetmanagement fees as well as the benefit of a lower effective tax rate.

Mortality experience improved, particularly in the U.K. payout annuity and group insurance businesses. Investmentgains increased due to trading gains and improved investment results as well as recoveries on previously impairedassets. Asset management fees increased due to growth in average assets under management as a result ofhigher average equity market levels compared to a year ago. The effective tax rate in Europe benefited from theresolution of prior year income tax issues, income emerging from lower taxed jurisdictions and other income notsubject to tax.

Partly offsetting these increases were lower morbidity and new business gains and currency movement. Morbiditygains decreased mainly in the U.K. group insurance business as terminations experience was not as favourable aslast year. New business gains declined in the payout annuity business, reflecting lower sales volumes and lessfavourable pricing this year. A reduction in excess interest rate mismatch reserves increased earnings in 2009.

For the six months ended June 30, 2010, net earnings increased $96 million compared to the same period lastyear. In 2009, net earnings were reduced by charges for future credit losses in actuarial liabilities and investmentimpairments. The increase in 2010 also reflects improved mortality results, mainly in the U.K. payout annuitybusiness, higher investment gains and higher asset management fees. Partly offsetting these increases were lowermorbidity gains, mainly in the U.K. group insurance business and lower new business income. A higher effectivetax rate and currency movement partly offset earnings growth.

Net earnings increased $25 million compared with the previous quarter, primarily due to improved mortality resultsin the U.K. payout annuity and group insurance businesses and the impact of a lower effective tax rate. Partlyoffsetting these increases were lower new business income, mainly in the U.K. payout annuity business, lowermorbidity gains in the U.K. group insurance business, lower investment gains and currency movement.

30



GR

EA

T-WEST LIFEC

O IN

C.


REINSURANCE

OPERATING RESULTS


2010March 31

2010June 30 2009

June 30 2010

June 30 2009

Premiums and deposits $ 866 $ 868 $ 1,097 $ 1,734 $ 2,248Fee and other income 9 11 5 20 18Net earnings 20 41 51 61 72

Premiums and depositsPremiums and deposits for the quarter decreased $231 million compared with last year. The decrease wasprimarily due to the recapture of a reinsurance contract in 2009 and currency movement, partially offset by highervolumes.

For the six months ended June 30, 2010, premiums and deposits decreased $514 million compared to the sameperiod last year. The decrease was primarily due to the recapture of a reinsurance contract in 2009 and currencymovement.

Premiums and deposits decreased $2 million compared with the previous quarter.

Fee and other incomeFee and other income for the quarter increased $4 million reflecting higher new business volumes.

For the six months ended June 30, 2010, fee and other income increased $2 million compared to the same periodlast year. The increase was due to higher new business volumes, partially offset by a 2009 commutation andcurrency movement.

Fee and other income was $2 million lower than the previous quarter.

Net earningsNet earnings for the quarter decreased $31 million compared with last year. The decrease was primarily due to aprovision for the earthquake in Chile of $16 million and unfavourable currency movement, partially offset byfavourable renewal profits and mortality experience.

For the six months ended June 30, 2010, net earnings decreased $11 million compared to the same period lastyear. The decrease was primarily due to the Chilean earthquake provision and unfavourable mortality as well ascurrency movement. The decrease was partially offset by higher renewal profits in 2010 and charges for futurecredit losses in actuarial liabilities in 2009.

Net earnings decreased $21 million compared to the previous quarter, primarily due to the Chilean earthquakeprovision and lower investment gains, partially offset by improved mortality experience and higher renewal profits inthe second quarter. EUROPE CORPORATEThe Europe Corporate account includes financing charges, the impact of certain non-continuing items as well asthe results for the non-core international businesses.

Europe Corporate reported a net loss for the quarter of $4 million compared to a net loss of $3 million in the secondquarter of 2009. For the six months ended June 30, 2010, Europe Corporate reported a net loss of $6 million at thesame level as 2009. Compared to the previous quarter, net earnings decreased $2 million mainly due to lowerearnings in the international businesses.

31



GR

EA

T-W

EST

LIFE

CO

INC

.


LIFECO CORPORATE OPERATING RESULTS

The Lifeco Corporate segment includes operating results for activities of Lifeco that are not associated with themajor business units of the Company. Lifeco Corporate reported minimal net earnings in the second quarter of 2010 compared to a net loss of $2 millionin 2009. The change is primarily due to a higher allocation of preferred share dividends to the Canada Corporatesegment.

For the six months ended June 30, 2010, Lifeco Corporate reported minimal net earnings compared to a net loss of$7 million for the same period in 2009 due to a higher allocation of preferred share dividends to the CanadaCorporate segment.

Net earnings were at the same level compared to the first quarter of 2010.

OTHER INFORMATION

QUARTERLY FINANCIAL INFORMATION

Quarterly financial information(in $ millions, except per share amounts)

2010 2009 2008Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3

Total revenue $ 7,366 $ 8,270 $ 6,001 $10,389 $ 9,218 $ 4,933 $ 6,580 $ 3,971

Common ShareholdersNet earnings

Total 433 441 443 445 413 326 (907) 436Basic - per share 0.457 0.466 0.468 0.471 0.437 0.345 (1.011) 0.487Diluted - per share 0.457 0.465 0.467 0.470 0.437 0.345 (1.009) 0.485

Operating earnings(1)

Total 433 441 443 445 413 326 525 436Basic - per share 0.457 0.466 0.468 0.471 0.437 0.345 0.586 0.487Diluted - per share 0.457 0.465 0.467 0.470 0.437 0.345 0.585 0.485

(1) Operating earnings are presented as a non-GAAP financial measure of earnings performance before certain other items that managementconsiders to be of a non-recurring nature. Refer to "Non-GAAP Financial Measures" section of this report.

Q4 2008 per share

Total basic dilutedOperating earnings $ 525 $ 0.586 $ 0.585Other items

Goodwill and intangible assets impairment $ (1,353) $ (1.508) $ (1.505)Valuation allowance, income tax (34) (0.038) (0.038)Restructuring costs (45) (0.051) (0.051)

Net earnings $ (907) $ (1.011) $ (1.009)

Lifeco's net earnings attributable to common shareholders were $433 million for the second quarter of 2010compared to $413 million reported a year ago. On a per share basis, this represents $0.457 per common share($0.457 diluted) for the second quarter of 2010 compared to $0.437 per common share ($0.437 diluted) a year ago.

32



GR

EA

T-WEST LIFEC

O IN

C.


Total revenue for the second quarter of 2010 was $7,366 million and was comprised of premium income of $4,215million, regular net investment income of $1,342 million, change in fair value of held for trading assets of $1,091million, and fee and other income of $718 million. Total revenue for the second quarter of 2009 was $9,218 million,comprised of premium income of $4,664 million, regular net investment income of $1,616 million, change in fairvalue of held for trading assets of $2,272 million and fee and other income of $666 million.

DISCLOSURE CONTROLS AND PROCEDURESBased on their evaluations as of June 30, 2010, the President and Chief Executive Officer and the Executive Vice-President and Chief Financial Officer have concluded that the Company's disclosure controls and procedures areeffective at the reasonable assurance level in ensuring that information relating to the Company which is requiredto be disclosed in reports filed under provincial and territorial securities legislation is: (a) recorded, processed,summarized and reported within the time periods specified in the provincial and territorial securities legislation, and(b) accumulated and communicated to the Company's senior management, including the President and ChiefExecutive Officer and the Executive Vice-President and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

INTERNAL CONTROL OVER FINANCIAL REPORTINGThe Company’s internal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withGAAP. The Company’s management is responsible for establishing and maintaining adequate internal control overfinancial reporting for Lifeco. All internal control systems have inherent limitations and may become inadequatebecause of changes in conditions. Therefore, even those systems determined to be effective can provide onlyreasonable assurance with respect to financial statement preparation and presentation.

There have been no changes in the Company’s internal control over financial reporting during the period endedJune 30, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

TRANSLATION OF FOREIGN CURRENCYThrough its operating subsidiaries, Lifeco conducts business in multiple currencies. The four primary currencies arethe Canadian dollar, the United States dollar, the British pound, and the euro. Throughout this document, foreigncurrency assets and liabilities are translated into Canadian dollars at the market rate at the end of the financialperiod. All income and expense items are translated at an average rate for the period. The rates employed are:

Translation of foreign currencyPeriod ended June 30

2010Mar. 31

2010Dec. 31

2009Sept. 30

2009June 30

2009Mar. 31

2009U.S. dollarBalance sheet $1.06 $1.02 $1.05 $1.07 $1.16 $1.26Income & expenses $1.03 $1.04 $1.06 $1.10 $1.17 $1.25

British poundBalance sheet $1.59 $1.54 $1.69 $1.72 $1.91 $1.80Income & expenses $1.53 $1.62 $1.73 $1.80 $1.81 $1.79

EuroBalance sheet $1.30 $1.37 $1.50 $1.57 $1.63 $1.67Income & expenses $1.31 $1.44 $1.56 $1.57 $1.59 $1.62

33



GR

EA

T-W

EST

LIFE

CO

INC

.


SEGREGATED AND MUTUAL FUNDS DEPOSITS AND SELF-FUNDED PREMIUM EQUIVALENTS (ASOCONTRACTS)The financial statements of a life insurance company do not include the assets, liabilities, deposits and withdrawalsof segregated funds, mutual funds or the claims payments related to ASO group health contracts. However, theCompany does earn fee and other income related to these contracts. Segregated funds, mutual funds and ASOcontracts are an important aspect of the overall business of the Company and should be considered whencomparing volumes, size and trends.

Additional information relating to Lifeco, including Lifeco's most recent financial statements, CEO/CFO certificationand Annual Information Form are available at www.sedar.com.

34



GR

EA

T-WEST LIFEC

O IN

C.

35

SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited) (in $ millions except per share amounts)

For the three months ended For the six months ended June 30 March 31 June 30 June 30 June 30 2010 2010 2009 2010 2009 Income Premium income $ 4,215 $ 4,610 $ 4,664 $ 8,825 $ 9,373 Net investment income (note 2) Regular net investment income 1,342 1,422 1,616 2,764 3,127

Changes in fair value on held for trading assets 1,091 1,502

2,272 2,593 305

Total net investment income 2,433 2,924 3,888 5,357 3,432 Fee and other income 718 736 666 1,454 1,346 7,366 8,270 9,218 15,636 14,151 Benefits and expenses Policyholder benefits 3,861 3,888 4,126 7,749 8,735

Policyholder dividends and experience refunds 351 383

371 734 769

Change in actuarial liabilities 1,410 2,300 2,976 3,710 1,335 Total paid or credited to

policyholders 5,622 6,571

7,473 12,193 10,839 Commissions 364 363 353 727 660 Operating expenses 629 630 628 1,259 1,291 Premium taxes 61 65 68 126 123 Financing charges (note 4) 70 69 106 139 181

Amortization of finite life intangible assets 24 23

25 47 47

Earnings before income taxes 596 549 565 1,145 1,010 Income taxes - current (19) 1 21 (18) 103 - future 134 85 101 219 97 Net earnings before non-controlling interests 481 463

443 944 810

Non-controlling interests 26 2 12 28 36 Net earnings 455 461 431 916 774 Perpetual preferred share dividends 22 20 18 42 35 Net earnings - common shareholders $ 433 $ 441

$ 413 $ 874 $ 739

Earnings per common share (note 9)

Basic $ 0.457 $ 0.466 $ 0.437 $ 0.923 $ 0.783 Diluted $ 0.457 $ 0.465 $ 0.437 $ 0.922 $ 0.782



GR

EA

T-W

EST

LIFE

CO

INC

.

36

CONSOLIDATED BALANCE SHEETS (unaudited) (in $ millions)

June 30 December 31 June 30 2010 2009 2009 Assets Bonds (note 2) $ 69,944 $ 66,147 $ 67,376 Mortgage loans (note 2) 16,536 16,684 17,349 Stocks (note 2) 6,563 6,442 6,093 Real estate (note 2) 3,108 3,099 3,378 Loans to policyholders 7,052 6,957 7,416 Cash and cash equivalents 2,918 3,427 3,357 Funds held by ceding insurers 10,345 10,839 11,761 Goodwill 5,405 5,406 5,418 Intangible assets 3,226 3,238 3,426 Other assets 6,223 6,130 6,070 Total assets $ 131,320 $ 128,369 $ 131,644

Liabilities Policy liabilities Actuarial liabilities $ 100,072 $ 98,059 $ 100,127 Provision for claims 1,242 1,308 1,352 Provision for policyholder dividends 619 606 636 Provision for experience rating refunds 279 317 286 Policyholder funds 2,470 2,361 2,409 104,682 102,651 104,810

Debentures and other debt instruments 4,282 4,142 3,903 Funds held under reinsurance contracts 359 186 169 Other liabilities 4,747 4,608 5,202 Repurchase agreements 867 532 203 Deferred net realized gains 119 133 150 115,056 112,252 114,437

Preferred shares (note 5) - 203 779 Capital trust securities and debentures 535 540 786 Non-controlling interests Participating account surplus in subsidiaries 2,041 2,004 2,018 Preferred shares issued by subsidiaries 157 157 157 Perpetual preferred shares issued by subsidiaries 146 147 149 Non-controlling interests in capital stock and surplus 76 63 48

Share capital and surplus Share capital (note 5) Perpetual preferred shares 1,647 1,497 1,327 Common shares 5,790 5,751 5,741 Accumulated surplus 7,655 7,367 7,064 Accumulated other comprehensive loss (1,837) (1,664) (911) Contributed surplus 54 52 49 13,309 13,003 13,270 Total liabilities, share capital and surplus $ 131,320 $ 128,369 $ 131,644



GR

EA

T-WEST LIFEC

O IN

C.

37

CONSOLIDATED STATEMENTS OF SURPLUS (unaudited) (in $ millions)

For the six months ended June 30 2010 2009

Accumulated surplus Balance, beginning of year $ 7,367 $ 6,906 Net earnings 916 774 Share issue costs (3) - Dividends to shareholders Perpetual preferred shareholders (42) (35) Common shareholders (583) (581) Balance, end of period $ 7,655 $ 7,064 Accumulated other comprehensive loss, net of income taxes Balance, beginning of year $ (1,664) $ (787) Other comprehensive loss (173) (124) Balance, end of period $ (1,837) $ (911) Contributed surplus Balance, beginning of year $ 52 $ 44 Stock option expense Current period expense (note 7) 3 5 Exercised (1) - Balance, end of period $ 54 $ 49



GR

EA

T-W

EST

LIFE

CO

INC

.

38

SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited) (in $ millions)

For the three months For the six months ended June 30 ended June 30 2010 2009 2010 2009 Net earnings $ 455 $ 431 $ 916 $ 774 Other comprehensive income (loss)

Unrealized foreign exchange gains (losses) on translation of foreign operations 246

(311) (233) (129)

Income tax (expense) benefit - (1) - (1)

Unrealized gains (losses) on available for sale assets 109 104 163 (23) Income tax (expense) benefit (25) (33) (40) (6)

Realized (gains) losses on available for sale assets 4 (20) (9) (35) Income tax (expense) benefit 1 3 4 6

Unrealized gains (losses) on cash flow hedges (100) 171 (66) 89 Income tax (expense) benefit 35 (60) 23 (31)

Realized (gains) losses on cash flow hedges - (34) - (15) Income tax (expense) benefit - 12 - 5

Non-controlling interests (18) 12 (15) 16 252 (157) (173) (124) Comprehensive income $ 707 $ 274 $ 743 $ 650



GR

EA

T-WEST LIFEC

O IN

C.

39

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in $ millions)

For the three months For the six months ended June 30 ended June 30 2010 2009 2010 2009 Operations Net earnings $ 455 $ 431 $ 916 $ 774 Adjustments: Change in policy liabilities 1,430 2,817 3,753 1,228 Change in funds held by ceding insurers 212 66 275 210 Change in funds held under reinsurance contracts 13 (3) 166 (11) Change in current income taxes payable 89 (100) 25 (207) Future income tax expense 134 101 219 97 Changes in fair value of financial instruments (1,091) (2,241) (2,595) (273) Other 75 (4) (245) 4 Cash flows from operations 1,317 1,067 2,514 1,822 Financing Activities Issue of common shares 8 4 39 5 Issue of preferred shares - - 150 - Redemption of preferred shares - - (200) - Increase in line of credit in subsidiary 5 82 125 182 Repayment of debentures and other debt instruments 4 (30) 1 (32) Share issue costs - - (3) - Dividends paid (314) (308) (625) (616) (297) (252) (513) (461) Investment Activities Bond sales and maturities 4,556 5,440 9,140 10,437 Mortgage loan repayments 572 374 966 793 Stock sales 356 655 805 1,277 Real estate sales 9 1 9 8 Change in loans to policyholders (54) (9) (54) (55) Change in repurchase agreements 104 (257) 325 (73) Investment in bonds (5,636) (5,501) (11,250) (11,080) Investment in mortgage loans (684) (491) (974) (681) Investment in stocks (526) (643) (1,148) (1,436) Investment in real estate (86) (20) (143) (85) (1,389) (451) (2,324) (895) Effect of changes in exchange rates on cash and cash equivalents 50 14 (186) 41 Increase (decrease) in cash and cash equivalents (319) 378 (509) 507 Cash and cash equivalents, beginning of period 3,237 2,979 3,427 2,850 Cash and cash equivalents, end of period $ 2,918 $ 3,357 $ 2,918 $ 3,357



GR

EA

T-W

EST

LIFE

CO

INC

.

40

Notes to Consolidated Financial Statements (unaudited)

(in $ millions except per share amounts)

1. Basis of Presentation and Summary of Accounting Policies The interim unaudited consolidated financial statements of Great-West Lifeco Inc. (Lifeco or the Company) at June 30, 2010 have been prepared in accordance with Canadian generally accepted accounting principles, using the same accounting policies and methods of computation followed in the consolidated financial statements for the year ended December 31, 2009. During the six months ended June 30, 2010 the Company did not adopt any changes in accounting policy that resulted in a material impact to the financial statements of the Company. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s annual report dated December 31, 2009. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The valuation of policy liabilities, certain financial assets and liabilities, goodwill and indefinite life intangible assets, income taxes and pension plans and other post-retirement benefits are the most significant components of the Company’s financial statements subject to management estimates. The year to date results of the Company reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. Financial instrument carrying values currently reflect the illiquidity of the markets and the liquidity premiums embedded in the market pricing methods the Company relies upon. The estimation of policy liabilities relies upon investment credit ratings. The Company's practice is to use third party independent credit ratings where available. Credit rating changes may lag developments in the current environment. Subsequent credit rating adjustments will impact policy liabilities. (a)Future Accounting Policies

International Financial Reporting Standards (IFRS) The Canadian Accounting Standards Board has mandated that all Canadian publicly accountable entities are required to transition from Canadian generally accepted accounting principles (GAAP) to IFRS for fiscal years beginning on or after January 1, 2011. Consequently, the Company will adopt IFRS in its quarterly and annual reports starting with the first quarter of 2011 and will provide corresponding comparative information for 2010. The Company continues to evaluate the financial statement impact of transitioning from Canadian GAAP to IFRS and the related effect on its information systems and processes. Until this effort is complete, the impact of adopting IFRS and the related effects on the Company’s consolidated financial statements cannot be reasonably determined. The IFRS standard that deals with the measurement of insurance contracts, also referred to as Phase II Insurance Contracts, is currently being developed and a final accounting standard is not expected to be implemented for several years. As a result, the Company will continue to measure insurance liabilities using the Canadian Asset Liability Method (CALM) until such time when a new IFRS standard for insurance contract measurement is issued. Consequently, the evolving nature of IFRS will likely result in additional accounting changes, some of which may be significant, in the years following the Company’s initial transition to IFRS.



GR

EA

T-WEST LIFEC

O IN

C.

41

2. Portfolio Investments (a) Carrying values and estimated market values of portfolio investments are as follows:

June 30, 2010

Held-for- trading

Available- for-sale


Other

Total carrying

value

Total fair

value Bonds $ 54,658 $ 6,059 $ 9,227 $ - $ 69,944 $ 70,580 Mortgage loans - - 16,536 - 16,536 17,336 Stocks 5,167 1,068 - 328 6,563 6,577 Real estate - - - 3,108 3,108 3,193 $ 59,825 $ 7,127 $ 25,763 $ 3,436 $ 96,151 $ 97,686 December 31, 2009 Held-for-

trading Available- for-sale


Other

Total carryingvalue

Total fair value

Bonds $ 52,362 $ 4,620 $ 9,165 $ - $ 66,147 $ 66,403 Mortgage loans - - 16,684 - 16,684 16,891 Stocks 4,928 1,186 - 328 6,442 6,503 Real estate - - - 3,099 3,099 3,053 $ 57,290 $ 5,806 $ 25,849 $ 3,427 $ 92,372 $ 92,850 June 30, 2009 Held-for-



Other

Total carryingvalue

Total fair value

Bonds $ 52,628 $ 5,233 $ 9,515 $ - $ 67,376 $ 67,398 Mortgage loans - - 17,349 - 17,349 17,095 Stocks 4,373 1,391 - 329 6,093 6,142 Real estate - - - 3,378 3,378 3,044 $ 57,001 $ 6,624 $ 26,864 $ 3,707 $ 94,196 $ 93,679



GR

EA

T-W

EST

LIFE

CO

INC

.

42

(b) Included in portfolio investments are the following:

(i) Impaired investments June 30, 2010 Gross

amount

Impairment Carrying amount

Impaired amounts by type (1) Held for trading $ 568 $ (254) $ 314 Available for sale 57 (33) 24 Loans and receivables 152 (80) 72

Total $ 777 $ (367) $ 410

December 31, 2009 Gross

amount


Impaired amounts by type (1) Held for trading $ 517 $ (278) $ 239 Available for sale 55 (36) 19 Loans and receivables 151 (81) 70

Total $ 723 $ (395) $ 328

June 30, 2009 Gross

amount


Impaired amounts by type (1) Held for trading $ 164 $ (142) $ 22 Available for sale 16 (16) - Loans and receivables 158 (85) 73

Total $ 338 $ (243) $ 95 Impaired investments include $30 gross amount of capital securities that have deferred coupons on a non-cumulative basis. (1) Excludes amounts in funds held by ceding insurers of $9 and impairment of $(3) at June 30, 2010 and

$10 and $(4) at December 31, 2009 and $16 and $(13) at June 30, 2009.

(ii) The Company holds investments with restructured terms or which have been exchanged for securities with amended terms. These investments are performing according to their new terms. Their carrying value is as follows: June 30 December 31 June 30 2010 2009 2009 Bonds $ 25 $ 36 $ 33 Bonds with equity conversion features 152 169 - Mortgages 1 1 1 $ 178 $ 206 $ 34



GR

EA

T-WEST LIFEC

O IN

C.

43

(iii) Included in net earnings is the impact of other than temporary impairment (OTTI) as follows: For the three months ended June 30, 2010 Held-for-



Other

Total

Impact on OTTI - Assets carried at market value $ (8) $ -

$ - $ - $ (8)

- Transfer from other comprehensive income - (6)

- - (6)

- Assets carried at amortized cost - -

(1) - (1)

Gross impairment charges (8) (6) (1) - (15) Release of actuarial default

provision and other 29 -

- - 29 Net impairment (charges)

recovery before income taxes $ 21 $ (6)

$ (1) $ - $ 14 Net impairment (charges)

recovery after income taxes $ 10

For the three months ended June 30, 2009 Held-for-



Other

Total

Impact on OTTI - Assets carried at market value $ 4 $ -

$ - $ - $ 4


(11) - (11)

Gross impairment charges 4 - (11) - (7) Release of actuarial default

provision and other - -

- - - Net impairment (charges)

recovery before income taxes $ 4 $ -

$ (11) $ - $ (7) Net impairment (charges)

recovery after income taxes $ (4)



GR

EA

T-W

EST

LIFE

CO

INC

.

44

For the six months ended June 30, 2010 Held-for-



Other

Total


$ - $ - $ (52)

- Transfer from other comprehensive income - (10)

- - (10)


(1) - (1)

Gross impairment charges (52) (10) (1) - (63) Release of actuarial default

provision and other 88 -

- - 88 Net impairment (charges)

recovery before income taxes $ 36 $ (10)

$ (1) $ - $ 25 Net impairment (charges)

recovery after income taxes $ 19

For the six months ended June 30, 2009 Held-for-



Other

Total


$ - $ - $ (3)


(30) - (30)

Gross impairment charges (3) - (30) - (33) Release of actuarial default

provision and other - -

- - - Net impairment (charges)

recovery before income taxes $ (3) $ -

$ (30) $ - $ (33) Net impairment (charges)

recovery after income taxes $ (23)



GR

EA

T-WEST LIFEC

O IN

C.

45

(c) Net investment income is comprised of the following: For the three months ended June 30, 2010

Bonds

Mortgage loans

Stocks

Real estate

Other

Total

Regular net investment income:

Investment income earned $ 941 $ 215 $ 47 $ 55 $ 98 $ 1,356 Net realized gains (losses) (available for sale) (7) - 4 - - (3)

Net realized gains (losses) (other classifications) - 5 - - - 5

Amortization of net realized/unrealized gains (non-financial instruments)

-

-

-

5

-

5

Net (provision) recovery for credit losses (loans and receivables)

-

(1)

-

-

-

(1)

Other income and expenses - - - - (20) (20) 934 219 51 60 78 1,342 Changes in fair value on held for trading assets:

Net realized/unrealized gains (losses) (classified held for trading)

34

-

-

-

-

34

Net realized/unrealized gains (losses) (designated held for trading)

1,525

-

(295)

-

(173)

1,057

1,559 - (295) - (173) 1,091 Net investment income $ 2,493 $ 219 $ (244) $ 60 $ (95) $ 2,433

For the three months ended June 30, 2009

Bonds

Mortgage loans

Stocks

Real estate

Other

Total

Regular net investment income:

Investment income earned $ 1,043 $ 228 $ 44 $ 48 $ 254 $ 1,617 Net realized gains (losses) (available for sale) 19 - 1 - - 20

Net realized gains (losses) (other classifications) 4 2 7 - - 13


-

-

-

(6)

-

(6)


(4)

(7)

-

-

-

(11)

Other income and expenses - - - - (17) (17) 1,062 223 52 42 237 1,616 Changes in fair value on held for trading assets:


(9)

-

-

-

-

(9)


1,749

-

627

-

(95)

2,281

1,740 - 627 - (95) 2,272 Net investment income $ 2,802 $ 223 $ 679 $ 42 $ 142 $ 3,888



GR

EA

T-W

EST

LIFE

CO

INC

.

46


Bonds

Mortgage

loans

Stocks

Real

estate

Other

Total Regular net investment income:

Investment income earned $ 1,878 $ 436 $ 90 $ 100 $ 264 $ 2,768 Net realized gains (losses) (available for sale) (3) - 12 - - 9

Net realized gains (losses) (other classifications) 10 8 - - - 18


-

-

-

7

-

7


-

(1)

-

-

-

(1)



49

-

-

-

-

49


2,860

-

(137)

-

(179)

2,544

2,909 - (137) - (179) 2,593 Net investment income $ 4,794 $ 443 $ (35) $ 107 $ 48 $ 5,357



GR

EA

T-WEST LIFEC

O IN

C.

47


Bonds

Mortgage

loans

Stocks

Real

estate

Other

Total Regular net investment income:

Investment income earned $ 2,107 $ 463 $ 88 $ 93 $ 324 $ 3,075 Net realized gains (losses) (available for sale) 35 - - - - 35

Net realized gains (losses) (other classifications) 1 6 83 - - 90


-

-

-

(10)

-

(10)


(16)

(14)

-

-

-

(30)



-

-

-

-

-

-


(45)

-

452

-

(102)

305

(45) - 452 - (102) 305 Net investment income $ 2,082 $ 455 $ 623 $ 83 $ 189 $ 3,432

Investment income earned is comprised of income from investments that are classified or designated as held for trading, classified as available for sale and classified as loans and receivables.

3. Risk Management

The Company has policies relating to the identification, measurement, monitoring, mitigating, and controlling of risks associated with financial instruments. The key risks related to financial instruments are credit risk, liquidity risk and market risk (currency, interest rate and equity). Our risk governance structure and risk management approach have not substantially changed from that described in our 2009 Annual Report. Certain risks have been outlined below. For a complete discussion of our risk governance structure and our risk management approach, see the "Financial Instrument Risk Management" note in the Company's consolidated financial statements dated December 31, 2009. The Company has also established policies and procedures designed to identify, measure and report all material risks. Management is responsible for establishing capital management procedures for implementing and monitoring the capital plan. The Board of Directors reviews and approves all capital transactions undertaken by management. (a) Credit Risk

Credit risk is the risk of financial loss resulting from the failure of debtors making payments when due.

(i) Concentration of Credit Risk

Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar credit risk characteristics in that they operate in the same geographic region or in similar industries.



GR

EA

T-W

EST

LIFE

CO

INC

.

48

The following table provides details of the carrying value of bonds by industry sector and geographic distribution: June 30, 2010

Canada

United States

Europe

Total Bonds issued or guaranteed by:

Canadian federal government $ 2,890 $ - $ 13 $ 2,903 Provincial, state and municipal governments

5,443

1,806

49

7,298

U.S. Treasury and other U.S. agencies

363

2,759

943

4,065

Other foreign governments 133 - 6,272 6,405 Government related 803 - 1,357 2,160 Sovereign 719 4 666 1,389 Asset-backed securities 2,807 3,572 868 7,247 Residential mortgage backed securities

47

846

102

995

Banks 2,470 474 2,234 5,178 Other financial institutions 1,089 1,471 1,480 4,040 Basic materials 161 552 211 924 Communications 598 269 502 1,369 Consumer products 1,529 1,573 1,597 4,699 Industrial products/services 567 706 177 1,450 Natural resources 1,075 701 493 2,269 Real estate 591 - 1,378 1,969 Transportations 1,501 591 593 2,685 Utilities 3,202 2,367 2,811 8,380 Miscellaneous 1,666 616 189 2,471 Total long term bonds 27,654 18,307 21,935 67,896 Short term bonds 1,176 683 189 2,048

$ 28,830 $ 18,990 $ 22,124 $ 69,944



GR

EA

T-WEST LIFEC

O IN

C.

49

December 31, 2009

Canada

United States

Europe


Canadian federal government $ 2,264 $ 1 $ 14 $ 2,279 Provincial, state and municipal governments

4,917

1,333

55

6,305


240

2,620

758

3,618


46

842

60

948

Banks 2,201 453 2,299 4,953 Other financial institutions 1,021 1,336 1,507 3,864 Basic materials 151 571 198 920 Communications 598 276 473 1,347 Consumer products 1,384 1,351 1,664 4,399 Industrial products/services 516 651 206 1,373 Natural resources 1,000 710 581 2,291 Real estate 559 - 1,216 1,775 Transportations 1,414 585 594 2,593 Utilities 3,008 2,172 2,702 7,882 Miscellaneous 1,489 562 182 2,233 Total long term bonds 25,109 16,773 21,267 63,149 Short term bonds 2,406 455 137 2,998

$ 27,515 $ 17,228 $ 21,404 $ 66,147



GR

EA

T-W

EST

LIFE

CO

INC

.

50

June 30, 2009

Canada

United States

Europe


Canadian federal government $ 1,930 $ 1 $ 10 $ 1,941 Provincial, state and municipal governments

4,630

1,394

73

6,097


270

3,201

777

4,248


75

979

64

1,118

Banks 2,164 425 2,425 5,014 Other financial institutions 1,046 1,154 1,570 3,770 Basic materials 140 609 217 966 Communications 594 338 445 1,377 Consumer products 1,401 1,326 1,806 4,533 Industrial products/services 590 680 243 1,513 Natural resources 974 625 628 2,227 Real estate 557 - 1,275 1,832 Transportations 1,338 642 695 2,675 Utilities 2,989 2,075 2,863 7,927 Miscellaneous 1,391 544 190 2,125 Total long term bonds 24,491 17,446 22,946 64,883 Short term bonds 1,947 381 165 2,493

$ 26,438 $ 17,827 $ 23,111 $ 67,376



GR

EA

T-WEST LIFEC

O IN

C.

51

(ii) Asset Quality

Bond Portfolio Quality June 30 December 31 June 30 2010 2009 2009 AAA $ 24,007 $ 21,754 $ 23,255 AA 11,382 10,585 10,960 A 20,786 19,332 19,319 BBB 10,468 10,113 10,517 BB and lower 1,253 1,365 832 67,896 63,149 64,883 Short term bonds 2,048 2,998 2,493 Total bonds $ 69,944 $ 66,147 $ 67,376 Derivative Portfolio Quality June 30 December 31 June 30 2010 2009 2009 Over-the-counter contracts (counterparty ratings):

AAA $ 7 $ 5 $ 3 AA 332 338 219 A 346 374 274 Total $ 685 $ 717 $ 496

(iii)Loans Past Due, But Not Impaired

Loans that are past due but not considered impaired are loans for which scheduled payments have not been received, but management has reasonable assurance of collection of the full amount of principal and interest due. The following table provides carrying values of the loans past due, but not impaired: June 30 December 31 June 30 2010 2009 2009 Less than 30 days $ 4 $ 45 $ 9 30 - 90 days 12 6 11 90 days and greater 1 9 3 Total $ 17 $ 60 $ 23

(iv)Performing Securities Subject to Deferred Coupons

Payment Resumption Date < 1 year 1 to 2 years > 2 years Coupon payment receivable $ - $ 2 $ -



GR

EA

T-W

EST

LIFE

CO

INC

.

52

(b) Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come due. The following policies and procedures are in place to manage this risk: The Company closely manages operating liquidity through cash flow matching of assets and liabilities

and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets.

Management closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or the capital markets.

(c) Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors which include three types: currency risk, interest rate (including related inflation) risk and equity risk. (i) Currency Risk

Currency risk relates to the Company operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. If the assets backing policy liabilities are not matched by currency, changes in foreign exchange rates can expose the Company to the risk of foreign exchange losses not offset by liability decreases. A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase

non-participating policy liabilities and their supporting assets by approximately the same amount resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non-participating policy liabilities and their supporting assets by approximately the same amount resulting in an immaterial change in net earnings.

(ii) Interest Rate Risk

Interest rate risk exists if asset and liability cash flows are not closely matched and interest rates change causing a difference in value between the asset and liability. Projected cash flows from the current assets and liabilities are used in CALM to determine policy liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Testing under several interest rate scenarios (including increasing and decreasing rates) is done to assess reinvestment risk. One way of measuring the interest rate risk associated with this assumption is to determine the effect on the policy liabilities impacting the shareholder earnings of the Company of a 1% immediate parallel shift in the yield curve. These interest rate changes will impact the projected cash flows. The effect of an immediate 1% parallel increase in the yield curve would be to increase these policy

liabilities by approximately $174 causing a decrease in net earnings of approximately $121. The effect of an immediate 1% parallel decrease in the yield curve would be to increase these policy

liabilities by approximately $43 causing a decrease in net earnings of approximately $29.



GR

EA

T-WEST LIFEC

O IN

C.

53

In addition to above, if this change in the yield curve persisted for an extended period the range of the tested scenarios might change. The effect of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported policy liability.

(iii) Equity Risk

Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. To mitigate price risk, the Company has investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. The risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Benefit guarantees consisting of purchasing equity futures, currency forwards, and interest rate swaps. For policies with segregated fund guarantees, the Company generally determines policy liabilities at a CTE75 (conditional tail expectation of 75) level. Some policy liabilities are supported by real estate, common stocks and private equities, for example segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity market values. There will be additional impacts on these liabilities as equity market values fluctuate. A 10% increase in equity markets would be expected to additionally decrease non-participating policy liabilities by approximately $31 causing an increase in net earnings of approximately $23. A 10% decrease in equity markets would be expected to additionally increase non-participating policy liabilities by approximately $114 causing a decrease in net earnings of approximately $81. The best estimate return assumptions for equities are primarily based on long term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows. A 1% increase in the best estimate assumption would be expected to decrease non-participating policy liabilities by approximately $307 causing an increase in net earnings of approximately $224. A 1% decrease in the best estimate assumption would be expected to increase non-participating policy liabilities by approximately $361 causing a decrease in net earnings of approximately $261.

4. Financing Charges Financing charges consist of the following: For the three months

ended June 30 For the six months

ended June 30 2010 2009 2010 2009 Operating charges:

Interest on operating lines and short-term debt instruments $ 3

$ 1 $ 6 $ 2

Financial charges:

Interest on long-term debentures and other debt instruments 56

52 110 104

Dividends on preferred shares classified as liabilities - 9 2 18 Net realized/unrealized losses (gains) on preferred shares classified as held for trading -

31 (2) 32

Other 3 2 7 4 Net interest on capital trust debentures and securities 8 11 16 21

67 105 133 179 Total $ 70 $ 106 $ 139 $ 181



GR

EA

T-W

EST

LIFE

CO

INC

.

54

5. Share Capital (a) Preferred Shares

On March 4, 2010 the Company issued 6,000,000 Series M, 5.80% Non-Cumulative First Preferred Shares at $25 per share. The shares are redeemable at the option of the Company on or after March 31, 2015 for $25 per share plus a premium if redeemed prior to March 31, 2019, in each case with all declared and unpaid dividends to but excluding the date of redemption. On March 31, 2010 the Company redeemed all of the remaining outstanding Series D First Preferred shares at a redemption price of $25.25 per share. The Company had designated outstanding Preferred Shares Series D as held for trading on the Consolidated Balance Sheets with changes in fair value reported in the Summaries of Consolidated Operations. In connection with the transaction the Company recognized unrealized gains of $2 in the Summaries of Consolidated Operations. As a result the Company no longer has any outstanding preferred shares classified as liabilities.

(b) Common Shares Issued and outstanding June 30, 2010 December 31, 2009 June 30, 2009

Number Carrying

value

Number Carrying

value

Number Carrying

value Common shares: Balance, beginning of year 945,040,476 $ 5,751 943,882,505 $ 5,736 943,882,505 $ 5,736 Issued under stock option

plan (exercised) 2,826,925

39

1,157,971

15

410,951

5

Balance, end of period 947,867,401 $ 5,790 945,040,476 $ 5,751 944,293,456 $ 5,741

6. Capital Management

At the holding company level, the Company monitors the amount of consolidated capital available, and the amounts deployed in its various operating subsidiaries. The amount of capital deployed in any particular company or country is dependent upon local regulatory requirements as well as the Company’s internal assessment of capital requirements in the context of its operational risks and requirements, and strategic plans. Since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include bank financing and the issuance of debentures and equity securities. The Company’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate. The capitalization of the Company and its operating subsidiaries will also take into account the views expressed by the various credit rating agencies that provide financial strength and other ratings to the Company. In Canada, The Office of the Superintendent of Financial Institutions Canada (OSFI) has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR).



GR

EA

T-WEST LIFEC

O IN

C.

55

For Canadian regulatory reporting purposes, capital is defined by OSFI in its MCCSR guideline. The following table provides the MCCSR information and ratios for The Great-West Life Assurance Company (Great-West Life): June 30 December 31 June 30 2010 2009 2009 Capital Available: Net Tier 1 Capital $ 7,187 $ 7,014 $ 7,064 Tier 2 Capital Allowed 1,663 1,856 2,088 Total Available Capital $ 8,850 $ 8,870 $ 9,152 Capital Required: Total Capital Required $ 4,385 $ 4,354 $ 4,464 MCCSR ratios: Tier 1 164% 161% 158% Total 202% 204% 205% In the United States, Great-West Life & Annuity Insurance Company (GWL&A) is subject to comprehensive state and federal regulation and supervision. The National Association of Insurance Commissioners (NAIC) has adopted risk-based capital rules and other financial ratios for U.S. life insurance companies. At December 31, 2009, the Risk-Based Capital (RBC) ratio for GWL&A was 476% of the Company Action Level. As at June 30, 2010 and 2009 the Company maintained capital levels above the minimum local requirements in its other foreign operations. The Company is both a user and a provider of reinsurance, including both traditional reinsurance, which is undertaken primarily to mitigate against assumed insurance risks, and financial or finite reinsurance, under which the amount of insurance risk passed to the reinsurer or its reinsureds may be more limited. The Company is required to put amounts on deposit for certain reinsurance transactions. These amounts on deposit are presented in funds held by ceding insurers on the Consolidated Balance Sheets. Some of these amounts on deposit support surplus.

7. Stock Based Compensation No options were granted under the Company's stock option plan during the second quarter and 863,000 options were granted during the first quarter of 2010 (no options were granted under the Company's stock option plan during the first and second quarter of 2009). The weighted average fair value of options granted was $4.34 per option during the six months ended June 30, 2010. Compensation expense relating to the Company's stock option plan of $3 after-tax has been recognized in the Summaries of Consolidated Operations for the six months ended June 30, 2010 ($5 after-tax for the six months ended June 30, 2009).



GR

EA

T-W

EST

LIFE

CO

INC

.

56

8. Pension Plans and Other Post-Retirement Benefits The total benefit costs included in operating expenses are as follows: For the three months For the six months ended June 30 ended June 30 2010 2009 2010 2009 Pension benefits $ 24 $ 20 $ 40 $ 36 Other benefits 4 3 7 6 Total $ 28 $ 23 $ 47 $ 42

9. Earnings per Common Share

The following table provides the reconciliation between basic and diluted earnings per common share: For the three months For the six months ended June 30 ended June 30 2010 2009 2010 2009 Earnings Net earnings $ 455 $ 431 $ 916 $ 774 Perpetual preferred share dividends 22 18 42 35 Net earnings - common shareholders $ 433 $ 413 $ 874 $ 739 Number of common shares Average number of common shares

outstanding 947,648,873 944,194,975 946,877,593 944,056,508 Add:

- Potential exercise of outstanding stock options 985,134 1,332,473 1,419,075 812,929

Average number of common shares outstanding - diluted basis 948,634,007 945,527,448 948,296,668 944,869,437

Basic earnings per common share $ 0.457 $ 0.437 $ 0.923 $ 0.783 Diluted earnings per common share $ 0.457 $ 0.437 $ 0.922 $ 0.782



GR

EA

T-WEST LIFEC

O IN

C.

57

10. Segmented Information Consolidated Operations For the three months ended June 30, 2010 United Lifeco Canada States Europe Corporate Total Income: Premium income $ 2,228 $ 675 $ 1,312 $ - $ 4,215 Net investment income

Regular net investment income 589 324 425 4 1,342 Changes in fair value on held for trading assets 187 404

500 - 1,091

Total net investment income 776 728 925 4 2,433 Fee and other income 255 307 156 - 718

Total income 3,259 1,710 2,393 4 7,366

Benefits and expenses: Paid or credited to policyholders 2,278 1,247 2,097 - 5,622 Other 602 380 140 2 1,124 Amortization of finite life intangible assets 10 13 1 - 24

Earnings before income taxes 369 70 155 2 596

Income taxes 90 16 7 2 115

Net earnings before non-controlling interests 279 54 148 - 481

Non-controlling interests 24 - 2 - 26

Net earnings 255 54 146 - 455

Perpetual preferred share dividends 18 - 4 - 22

Net earnings - common shareholders $ 237 $ 54 $ 142 $ - $ 433



GR

EA

T-W

EST

LIFE

CO

INC

.

58

For the three months ended June 30, 2009 United Lifeco Canada States Europe Corporate Total Income: Premium income $ 2,243 $ 609 $ 1,812 $ - $ 4,664 Net investment income

Regular net investment income 741 357 512 6 1,616 Changes in fair value on held for trading assets 805 546

921 - 2,272

Total net investment income 1,546 903 1,433 6 3,888 Fee and other income 229 291 146 - 666

Total income 4,018 1,803 3,391 6 9,218

Benefits and expenses: Paid or credited to policyholders 3,085 1,363 3,025 - 7,473 Other 585 367 199 4 1,155 Amortization of finite life intangible assets 8 15 2 - 25

Earnings before income taxes 340 58 165 2 565

Income taxes 101 8 13 - 122

Net earnings before non-controlling interests 239 50 152 2 443

Non-controlling interests 12 1 (1) - 12

Net earnings 227 49 153 2 431

Perpetual preferred share dividends 10 - 4 4 18

Net earnings - common shareholders $ 217 $ 49 $ 149 $ (2) $ 413



GR

EA

T-WEST LIFEC

O IN

C.

59

For the six months ended June 30, 2010 United Lifeco Canada States Europe Corporate Total Income: Premium income $ 4,496 $ 1,501 $ 2,828 $ - $ 8,825 Net investment income

Regular net investment income 1,208 658 893 5 2,764 Changes in fair value on held for trading assets 608 696

1,289 - 2,593

Total net investment income 1,816 1,354 2,182 5 5,357 Fee and other income 511 624 319 - 1,454

Total income 6,823 3,479 5,329 5 15,636

Benefits and expenses: Paid or credited to policyholders 4,958 2,537 4,698 - 12,193 Other 1,189 758 302 2 2,251 Amortization of finite life intangible assets 19 25 3 - 47

Earnings before income taxes 657 159 326 3 1,145

Income taxes 129 36 33 3 201


Non-controlling interests 23 1 4 - 28

Net earnings 505 122 289 - 916

Perpetual preferred share dividends 35 - 7 - 42

Net earnings - common shareholders $ 470 $ 122 $ 282 $ - $ 874



GR

EA

T-W

EST

LIFE

CO

INC

.

60

For the six months ended June 30, 2009 United Lifeco Canada States Europe Corporate Total Income: Premium income $ 4,317 $ 1,564 $ 3,492 $ - $ 9,373 Net investment income

Regular net investment income 1,288 799 1,033 7 3,127 Changes in fair value on held for trading assets 483 325

(503) - 305

Total net investment income 1,771 1,124 530 7 3,432 Fee and other income 451 574 321 - 1,346

Total income 6,539 3,262 4,343 7 14,151

Benefits and expenses: Paid or credited to policyholders 4,768 2,307 3,764 - 10,839 Other 1,116 756 376 7 2,255 Amortization of finite life intangible assets 15 29 3 - 47

Earnings before income taxes 640 170 200 - 1,010

Income taxes 163 40 (3) - 200


Non-controlling interests 31 6 (1) - 36

Net earnings 446 124 204 - 774

Perpetual preferred share dividends 21 - 7 7 35

Net earnings - common shareholders $ 425 $ 124 $ 197 $ (7) $ 739



IGM

FINA

NC

IAL IN

C.


PA G E C 2


PA G E C 4 1

JUNE 30, 2010

Please note that the bottom of each page in Part C contains two different page numbers. A page number with the prefi x “C” refers to the number of such page in this document and the page number without any prefi x refers to the number of such page in the original document issued by IGM Financial Inc.

The attached documents concerning IGM Financial Inc. are documents prepared and publicly disclosed by such subsidiary. Certain statements in the attached documents, other than statements of historical fact, are forward-looking statements based on certain assumptions and refl ect the current expectations of the subsidiary as set forth therein. Forward-looking statements are provided for the purposes of assisting the reader in understanding the subsidiary’s fi nancial position and results of operations as at and for the periods ended on certain dates and to present information about the subsidiary’s management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes.

By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specifi c and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved.

For further information provided by the subsidiary as to the material factors that could cause actual results to diff er materially from the content of forward-looking statements and the material factors and assumptions that were applied in making the forward-looking statements, please see the attached documents, including the section entitled Forward-Looking Statements. The reader is cautioned to consider these factors and assumptions carefully and not to put undue reliance on forward-looking statements.

IGM FINANCIAL INC.

PA RT C

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 C 1

PFC_QUAT2_ENG03_IGM_2010-08-05_v01.indd C1PFC_QUAT2_ENG03_IGM_2010-08-05_v01.indd C1 8/6/10 8:14:20 AM8/6/10 8:14:20 AM

IGM

FIN

AN

CIA

L IN

C.

C 2 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0

4 i gm f inanc ial inc . s econd quarter report 2010 / management ’s d i scuss ion and analys i s

Management’s Discussion and Analysis

The Management’s Discussion and Analysis (MD&A) presents management’s view of the results of operations andfinancial condition of IGM Financial Inc. (IGM Financial or the Company) as at and for the three and six monthsended June 30, 2010 and should be read in conjunction with the unaudited interim Consolidated FinancialStatements included in this report, as well as the 2009 IGM Financial Inc. Annual Report and the 2010 IGMFinancial Inc. First Quarter Report to Shareholders filed on www.sedar.com. Commentary in the MD&A as at andfor the three and six months ended June 30, 2010 is as of August 4, 2010.

Certain statements in this MD&A, other thanstatements of historical fact, are forward-lookingstatements based on certain assumptions and reflectIGM Financial’s current expectations. Forward-lookingstatements are provided for the purposes of assistingthe reader in understanding the Company’s financialposition and results of operations as at and for theperiods ended on certain dates and to presentinformation about management’s current expectationsand plans relating to the future and readers arecautioned that such statements may not beappropriate for other purposes. These statements mayinclude, without limitation, statements regarding theoperations, business, financial condition, expectedfinancial results, performance, prospects,opportunities, priorities, targets, goals, ongoingobjectives, strategies and outlook of the Company, aswell as the outlook for North American andinternational economies, for the current fiscal yearand subsequent periods. Forward-looking statementsinclude statements that are predictive in nature,depend upon or refer to future events or conditions, orinclude words such as “expects”, “anticipates”,“plans”, “believes”, “estimates”,“seeks”, “intends”,“targets”, “projects”, “forecasts” or negative versionsthereof and other similar expressions, or future orconditional verbs such as “may”, “will”, “should”,“would” and “could”.

This information is based upon certain materialfactors or assumptions that were applied in drawing aconclusion or making a forecast or projection asreflected in the forward-looking statements, includingthe perception of historical trends, current conditionsand expected future developments, as well as otherfactors that are believed to be appropriate inthe circumstances.

By its nature, this information is subject toinherent risks and uncertainties that may be generalor specific and which give rise to the possibility that

expectations, forecasts, predictions, projections orconclusions will not prove to be accurate, thatassumptions may not be correct and that objectives,strategic goals and priorities will not be achieved.

A variety of material factors, many of which arebeyond the Company’s, and its subsidiaries’ control,affect the operations, performance and results of theCompany, and its subsidiaries, and their businesses,and could cause actual results to differ materiallyfrom current expectations of estimated or anticipatedevents or results. These factors include, but are notlimited to: the impact or unanticipated impact ofgeneral economic, political and market factors inNorth America and internationally, interest and foreignexchange rates, global equity and capital markets,management of market liquidity and funding risks,changes in accounting policies and methods used toreport financial condition (including uncertaintiesassociated with critical accounting assumptions andestimates), the effect of applying future accountingchanges (including adoption of International FinancialReporting Standards), operational and reputationalrisks, business competition, technological change,changes in government regulations and legislation,changes in tax laws, unexpected judicial or regulatoryproceedings, catastrophic events, the Company’sability to complete strategic transactions, integrateacquisitions and implement other growth strategies,and the Company’s success in anticipating andmanaging the foregoing factors.

The reader is cautioned that the foregoing list offactors is not exhaustive of the factors that may affectany of the Company’s forward-looking statements.The reader is also cautioned to consider these andother factors, uncertainties and potential eventscarefully and not place undue reliance on forward-looking statements.

Other than as specifically required by law, theCompany undertakes no obligation to update any

forward-looking statements to reflect events orcircumstances after the date on which suchstatements are made, or to reflect the occurrence ofunanticipated events, whether as a result of newinformation, future events or results, or otherwise.

Additional information about the risks anduncertainties of the Company’s business is providedin its disclosure materials filed with the securitiesregulatory authorities in Canada, available atwww.sedar.com.

NON-GAAP FINANCIAL MEASURES

Operating earnings available to commonshareholders, operating diluted earnings per share(EPS) and operating return on average commonequity (ROE) are non-GAAP financial measures whichare used to provide management and investors withadditional measures to assess earnings performance.These non-GAAP financial measures are not definednor do they have standard meanings under GAAP and,as a result, are not necessarily comparable to similarmeasures used by other companies.

Previously, the financial measures above weredescribed as adjusted net income available tocommon shareholders, adjusted diluted earnings pershare and adjusted return on common equity.

Earnings before interest and taxes (EBIT) andearnings before interest, taxes, depreciation andamortization (EBITDA) are also non-GAAP financialmeasures. EBIT and EBITDA are alternative measuresof performance utilized by management, investorsand investment analysts to evaluate and analyze theCompany’s results. These non-GAAP financialmeasures do not have standard meanings and are notdirectly comparable to any GAAP measure or tosimilar measures used by other companies.

FORWARD-LOOKING STATEMENTS


IGM

FINA

NC

IAL IN

C.


i gm f inanc ial inc . s econd quarter report 2010 / management ’s d i scuss ion and analys i s 5

IGM Financial Inc.Summary of Consolidated Operating Results

IGM Financial Inc. (TSX:IGM) is one of Canada’spremier financial services companies addressing thefinancial needs of Canadians. The Company’s principalbusinesses are Investors Group Inc. and MackenzieFinancial Corporation, each operating distinctly withinthe advice segment of the financial services market.

Total assets under management were $115.7 billionas at June 30, 2010 compared with $123.4 billion,$120.5 billion and $109.6 billion at March 31, 2010,December 31, 2009 and June 30, 2009, respectively.

Net earnings available to common shareholdersfor the second quarter ended June 30, 2010 were$179.1 million compared to $144.5 million for thesecond quarter of 2009, an increase of 23.9%. Dilutedearnings per share were 68 cents in 2010 compared to55 cents in 2009, an increase of 23.6%.

Net earnings available to common shareholders forthe six months ended June 30, 2010 were $357.8 millioncompared to $278.0 million for the comparative periodin 2009, an increase of 28.7%. Diluted earnings pershare were $1.36 in 2010 compared to $1.05 in 2009, anincrease of 29.5%.

Net earnings available to common shareholders of$179.1 million for the second quarter of 2010 increased$0.4 million or 0.2% from $178.7 million in the firstquarter of 2010. Diluted earnings per share were 68 centsin the second quarter, unchanged from the first quarter.

Shareholders’ equity was $4.4 billion as at June 30,2010, unchanged from December 31, 2009. Return onaverage common equity for the six months ended June 30,2010 was 16.7% compared with 13.4% in 2009. Thequarterly dividend per common share declared in thesecond quarter of 2010 was 51.25 cents, unchangedfrom the first quarter of 2010.

NON-GAAP FINANCIAL MEASURES

The reconciliation of non-GAAP results to reportedresults in accordance with GAAP related to EBITDA isprovided in Table 1. The reconciliation of non-GAAPresults to reported results in accordance with GAAPrelated to EBIT is provided in Tables 2, 3 and 4.

REPORTABLE SEGMENTS

IGM Financial’s reportable segments, which arediscussed in the Review of Segment Operating Resultssections of the MD&A, are:• Investors Group• Mackenzie• Corporate and Other

These segments reflect the current organizationalstructure and internal financial reporting. Managementmeasures and evaluates the performance of thesesegments based on EBIT as shown in Tables 2, 3 and 4.

TABLE 1: RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

three months ended six months ended

2010 2010 2009 2010 2009($ millions) june 30 march 31 june 30 june 30 june 30

EBITDA – Non-GAAP measure $ 351.6 $ 357.6 $ 320.0 $ 709.2 $ 614.6 Commission amortization (76.5) (75.3) (75.2) (151.7) (149.5)Amortization of capital and

intangible assets and other (8.4) (8.1) (8.6) (16.5) (16.6)Interest expense on long-term debt (27.6) (27.4) (27.4) (55.1) (49.2)Dividends on preferred shares

classified as liabilities – – (5.2) – (10.4)

Earnings before income taxes 239.1 246.8 203.6 485.9 388.9 Income taxes (57.8) (64.6) (59.1) (122.4) (110.9)Perpetual preferred share dividends (2.2) (3.5) – (5.7) –

Net earnings – GAAP $ 179.1 $ 178.7 $ 144.5 $ 357.8 $ 278.0


IGM

FIN

AN

CIA

L IN

C.



TABLE 2: CONSOLIDATED OPERATING RESULTS BY SEGMENT – Q2 2010 VS. Q2 2009

investors group mackenzie corporate & other totalThree months ended 2010 2009 2010 2009 2010 2009 2010 2009($ millions) june 30 june 30 june 30 june 30 june 30 june 30 june 30 june 30

RevenuesFee income $ 375.3 $ 325.5 $ 210.0 $ 195.2 $ 31.3 $ 27.9 $ 616.6 $ 548.6Net investment income

and other (1.0) 18.8 3.0 3.5 24.7 20.7 26.7 43.0

374.3 344.3 213.0 198.7 56.0 48.6 643.3 591.6

ExpensesCommission 120.2 109.6 74.7 69.4 20.4 18.3 215.3 197.3Non-commission 85.3 81.7 67.2 68.2 8.8 8.4 161.3 158.3

205.5 191.3 141.9 137.6 29.2 26.7 376.6 355.6

Earnings before interest and taxes $ 168.8 $ 153.0 $ 71.1 $ 61.1 $ 26.8 $ 21.9 266.7 236.0

Interest expense 27.6 32.4

Earnings before income taxes 239.1 203.6Income taxes 57.8 59.1

Net earnings 181.3 144.5Perpetual preferred share dividends 2.2 –

Net earnings available to common shareholders $ 179.1 $ 144.5

TABLE 3: CONSOLIDATED OPERATING RESULTS BY SEGMENT – YTD 2010 VS. YTD 2009

investors group mackenzie corporate & other totalSix months ended 2010 2009 2010 2009 2010 2009 2010 2009($ millions) june 30 june 30 june 30 june 30 june 30 june 30 june 30 june 30

RevenuesFee income $ 743.2 $ 622.5 $ 418.5 $ 379.4 $ 66.0 $ 56.8 $1,227.7 $1,058.7 Net investment income

and other 6.9 37.1 6.4 6.8 51.7 51.9 65.0 95.8

750.1 659.6 424.9 386.2 117.7 108.7 1,292.7 1,154.5

ExpensesCommission 237.7 216.5 148.3 135.5 43.8 37.7 429.8 389.7 Non-commission 167.6 160.9 136.5 138.3 18.0 17.6 322.1 316.8

405.3 377.4 284.8 273.8 61.8 55.3 751.9 706.5



Earnings before income taxes 485.9 388.9 Income taxes 122.4 110.9

Net earnings 363.5 278.0 Perpetual preferred share dividends 5.7 –



IGM

FINA

NC

IAL IN

C.



Effective January 1, 2010, the items noted belowwere reclassified to reflect changes in the Company’sinternal financial reporting:• The Company’s proportionate share of earnings of

Great-West Lifeco Inc. (Lifeco) and realized gains andlosses on the sale of equity securities were reclassifiedto the Corporate and Other segment and are recordedin Net investment income and other. Previouslythese amounts were recorded in Net investmentincome and other in the Investors Group Segment.

• Interest expense on the $225.0 million of long-termdebt incurred to finance the Company’s investmentin Lifeco is no longer allocated to a specific segmentand is reflected in Interest expense. Previously, theamount was recorded in Net investment income andother in the Investors Group segment. As a result,interest expense not allocated to segments includesinterest on all of the Company’s outstanding long-term debt.

Prior periods have been restated to reflect thisreclassification.

Certain items reflected in Tables 2, 3 and 4 are notallocated to segments:• Interest expense – Represents interest expense on

long-term debt and, for the comparative periods in2009, interest expense also included dividends paidon preferred shares classified as liabilities totalling$5.2 million in the second quarter and $10.4 millionin the six month period. These preferred shareswere redeemed by the Company on December 31,2009. In addition, interest expense in the first andsecond quarters of 2009 included interest expense onthe interim bridge credit facility of $287.0 millionrelated to the Saxon Financial Inc. (Saxon)acquisition which was repaid during the secondquarter of 2009.

Interest expense totalled $27.6 million in thesecond quarter compared with $27.3 million in the

TABLE 4: CONSOLIDATED OPERATING RESULTS BY SEGMENT – Q2 2010 VS. Q1 2010

investors group mackenzie corporate & other totalThree months ended 2010 2010 2010 2010 2010 2010 2010 2010($ millions) june 30 march 31 june 30 march 31 june 30 march 31 june 30 march 31

RevenuesFee income $ 375.3 $ 367.9 $ 210.0 $ 208.5 $ 31.3 $ 34.7 $ 616.6 $ 611.1 Net investment income

and other (1.0) 7.9 3.0 3.4 24.7 27.0 26.7 38.3

374.3 375.8 213.0 211.9 56.0 61.7 643.3 649.4

ExpensesCommission 120.2 117.5 74.7 73.6 20.4 23.4 215.3 214.5 Non-commission 85.3 82.3 67.2 69.3 8.8 9.2 161.3 160.8

205.5 199.8 141.9 142.9 29.2 32.6 376.6 375.3



Earnings before income taxes 239.1 246.8 Income taxes 57.8 64.6

Net earnings 181.3 182.2 Perpetual preferred share dividends 2.2 3.5



IGM

FIN

AN

CIA

L IN

C.



first quarter of 2010. Excluding dividends onpreferred shares classified as liabilities, interestexpense totalled $27.2 million in the second quarterof 2009. Interest expense on this basis totalled$54.9 million in the six months ended June 30, 2010compared with $48.7 million in the comparativeperiod in 2009.

• Income taxes – The effective income tax rates for theperiods under review are shown in Table 5.

Tax planning may result in the Company recordinglower levels of income taxes. Management monitorsthe status of its income tax filings, and regularlyassesses the overall adequacy of its provision forincome taxes and, as a result, income taxes recordedin prior years may be adjusted in the current year.Any changes in management’s best estimates arereflected in Other items, which also includes, but isnot limited to, the effect of lower effective incometax rates on foreign operations.

• Perpetual preferred share dividends – represents thedividends declared on the Company’s 5.90%non-cumulative first preferred shares issued onDecember 8, 2009. In the second quarter of 2010the dividend was $0.36875 per share or $2.2 million.

The dividends declared for the six months endingJune 30, 2010 totalled $5.7 million and included theinitial dividend of $0.57788 per share or $3.5 milliondeclared in the first quarter of 2010 related to theperiod from December 8, 2009 to April 30, 2010.

SUMMARY OF QUARTERLY RESULTS

Financial information for the eight most recentlycompleted quarters is shown in Table 6 and includes thereconciliation of non-GAAP financial measures to netearnings in accordance with GAAP.

Quarterly earnings are primarily dependent on thelevel of mutual fund assets under management. Declinesin average daily mutual fund assets under managementin the fourth quarter of 2008 and in the first quarter of2009 resulted from declines in global financial markets.Improving market conditions, beginning in the secondquarter of 2009 through to the latter part of the secondquarter of 2010, resulted in increased levels of averageassets under management and increased quarterlyearnings. Average daily mutual fund assets undermanagement by quarter are shown in Table 6.

TABLE 5: EFFECTIVE INCOME TAX RATE

three months ended six months ended

2010 2010 2009 2010 2009june 30 march 31 june 30 june 30 june 30

Income taxes at Canadian federal and provincial statutory rates 30.08% 30.06% 31.63% 30.07% 31.57%

Effect of:Dividend income (0.03) (0.18) (0.37) (0.10) (0.43)Net capital gains and losses (0.03) (0.36) (0.06) (0.20) (0.18)Proportionate share of affiliate’s earnings (2.16) (2.15) (1.61) (2.16) (2.90)Dividends paid on preferred shares

classified as liabilities – – 0.80 – 0.84Other items (3.70) (1.20) (1.36) (2.43) (0.39)

Effective income tax rate 24.16% 26.17% 29.03% 25.18% 28.51%


IGM

FINA

NC

IAL IN

C.



TABLE 6: SUMMARY OF QUARTERLY RESULTS2010 2010 2009 2009 2009 2009 2008 2008

q2 q1 q4 q3 q2 q1 q4 q3

Consolidated Statements of Earnings ($ millions)Revenues

Management fees $ 455.5 $ 449.7 $ 449.7 $ 432.1 $ 399.4 $ 365.4 $ 396.3 $ 477.0 Administration fees 89.2 88.5 88.3 88.6 86.9 82.3 84.2 88.1 Distribution fees 71.9 72.9 70.7 62.0 62.3 62.4 67.4 70.6 Net investment income and other 26.7 38.3 28.9 43.8 43.0 52.8 39.9 52.9

643.3 649.4 637.6 626.5 591.6 562.9 587.8 688.6

ExpensesCommission 215.3 214.5 213.5 205.3 197.3 192.4 206.4 230.0 Non-commission 161.3 160.8 148.7 148.7 158.3 158.5 162.6 155.4 Interest 27.6 27.3 33.2 33.0 32.4 26.7 28.3 26.1

404.2 402.6 395.4 387.0 388.0 377.6 397.3 411.5

239.1 246.8 242.2 239.5 203.6 185.3 190.5 277.1 Non-cash charge on AFS(1)

equity securities – – (76.5) – – – – –Premium paid on redemption

of preferred shares – – (14.4) – – – – –Proportionate share of affiliate’s

impairment charge – – – – – – (60.3) –Proportionate share of affiliate’s gain – – – – – – – –

Earnings before income taxes 239.1 246.8 151.3 239.5 203.6 185.3 130.2 277.1 Income taxes 57.8 64.6 37.6 72.1 59.1 51.8 50.4 78.4

Net earnings 181.3 182.2 113.7 167.4 144.5 133.5 79.8 198.7 Perpetual preferred share dividends 2.2 3.5 – – – – – –

Net earnings available to common shareholders – GAAP $ 179.1 $ 178.7 $ 113.7 $ 167.4 $ 144.5 $ 133.5 $ 79.8 $ 198.7

Reconciliation of Non-GAAP Financial Measures(2) ($ millions)Operating earnings available to common

shareholders – non-GAAP measure $ 179.1 $ 178.7 $ 176.5 $ 167.4 $ 144.5 $ 133.5 $ 140.1 $ 198.7 Non-cash charge on AFS equity

securities, net of tax – – (66.2) – – – – –Non-cash income tax benefit – – 17.8 – – – – –Premium paid on redemption

of preferred shares – – (14.4) – – – – –Proportionate share of affiliate’s

impairment charge – – – – – – (60.3) –Proportionate share of affiliate’s gain – – – – – – – –

Net earnings available to common shareholders – GAAP $ 179.1 $ 178.7 $ 113.7 $ 167.4 $ 144.5 $ 133.5 $ 79.8 $ 198.7

Earnings per Share (¢)GAAP

– Basic 68 68 43 63 55 51 30 75 – Diluted 68 68 43 63 55 51 30 75

Operating(2)

– Basic 68 68 67 63 55 51 53 75 – Diluted 68 68 67 63 55 51 53 75

Average Daily Mutual Fund Assets ($ billions) $ 100.5 $ 100.4 $ 98.6 $ 94.4 $ 88.2 $ 81.1 $ 85.6 $ 102.0

Total Mutual Fund Assets Under Management ($ billions) $ 96.5 $ 102.8 $ 100.4 $ 98.4 $ 91.6 $ 81.9 $ 85.0 $ 98.0

(1)AFS – Available for sale.(2)Refer to the Summary of Consolidated Operating Results section in the 2009 IGM Financial Inc. Annual Report for an explanation of the Company’s non-GAAP

financial measures.


IGM

FIN

AN

CIA

L IN

C.



Investors GroupReview of the Business

INVESTORS GROUP STRATEGY

Investors Group strives to ensure that the interests ofshareholders, clients, Consultants and employees areclosely aligned. Investors Group’s business strategy isfocused on:1. Growing our distribution network by attracting new

Consultants to our industry and the retention andcontinued support of existing Consultants.

2. Emphasizing the delivery of financial planningadvice, products and services through our dedicatednetwork of Consultants, particularly during periodsof market volatility.

3. Communicating actively with our Consultants andprimarily through them to our clients during alleconomic cycles.

4. Extending the diversity and range of productsoffered by Investors Group as we continue to buildand maintain enduring client relationships.

5. Maximizing returns on business investment byfocusing resources on initiatives that have directbenefits to clients and Consultants, controllingexpenditures, and becoming more efficient.

CONSULTANT NETWORK

Investors Group distinguishes itself from its competitionby offering personal financial planning to its clientswithin the context of long-term relationships. At thecentre of this relationship is a national distributionnetwork of Consultants in 95 region offices acrossCanada. Three new region offices in Saskatoon,Thunder Bay, and Belleville were announced and areexpected to open in late 2010 as Investors Groupcontinues to build its Consultant network.

At June 30, 2010, Investors Group had 4,667Consultants, compared with 4,633 at the end of 2009and 4,511 one year ago. The number of Consultantswith more than four years experience was 2,612compared to 2,591 at the end of 2009 and 2,518 a yearearlier. Our Consultant network has grown in each ofthe last twenty-four consecutive quarters, increasing by1,460 Consultants or 46% since June 30, 2004.

COMMUNICATING WITH CONSULTANTS AND CLIENTS

As a result of the significant market volatility experiencedin the latter part of 2008 and throughout 2009 and2010 to date as global stock markets recovered,communications to Consultants and clients increasedsubstantially. Consultants, in turn, maintain a highdegree of contact with our clients, continuing toreinforce the importance of long-term planning and adiversified investment portfolio. Ongoing surveys of ourclients indicate a strong appreciation of the value ofadvice provided by our Consultants through varyingeconomic cycles.


The level of assets under management is influenced bythree factors: sales, redemptions and net asset values ofour funds. Changes in assets under management for theperiods under review are reflected in Table 7.

At June 30, 2010, 70% of Investors Group mutualfunds (Investors, partner and portfolio funds) had arating of three stars or better from the Morningstar†

fund ranking service and 26% had a rating of four orfive stars. This compared to the Morningstar† universeof 69% for three stars or better and 31% for four andfive star funds at June 30, 2010. Morningstar† Ratingsare an objective, quantitative measure of a fund’s three,five and ten year risk-adjusted performance relative tocomparable funds.

2010 vs. 2009For the second quarter ended June 30, 2010, sales ofInvestors Group mutual funds through its Consultantnetwork were $1.3 billion, an increase of 19.1% from2009. Mutual fund redemptions, which totalled$1.4 billion for the same period, increased 18.3% from2009 levels. Investors Group’s twelve month trailingredemption rate for long-term funds was 7.7% atJune 30, 2010 compared to 7.5% at June 30, 2009,and remains well below the corresponding averageredemption rate of approximately 15.9% for all othermembers of the Investment Funds Institute of Canada(IFIC) at June 30, 2010. Net redemptions of InvestorsGroup mutual funds for the second quarter of 2010were $103 million compared with net redemptions of$95 million in 2009. Sales of long-term funds were


IGM

FINA

NC

IAL IN

C.



$1.1 billion for the second quarter of 2010, comparedwith $882 million in 2009, an increase of 30.3%. Netredemptions of long-term funds for the second quarterof 2010 were $56 million compared to net redemptionsof $52 million in 2009.

For the six months ended June 30, 2010, sales ofInvestors Group mutual funds through its Consultantnetwork were $3.2 billion, an increase of 26.3% from2009. Mutual fund redemptions, which totalled$2.7 billion for the same period, increased 18.2% from2009 levels. Net sales of Investors Group mutual fundsfor the first half of 2010 were $458 million comparedwith net sales of $215 million in 2009. Sales of long-term funds were $2.8 billion for the first half of 2010,compared with $2.0 billion in 2009. Net sales of long-term funds for the first half of 2010 were $509 millioncompared to net sales of $167 million in 2009.

Investors Group’s mutual fund assets undermanagement were $55.5 billion at June 30, 2010, asshown in Table 7. The increase in mutual fund assetsfor the twelve month period ended June 30, 2010 of$3.0 billion was primarily due to market appreciationresulting from improvements in global stock marketsduring 2009 and 2010.

Q2 2010 vs. Q1 2010The changes in assets under management in the secondquarter of 2010 compared with the first quarter of 2010are reflected in Table 7.

For the second quarter ended June 30, 2010, sales ofInvestors Group mutual funds through its Consultantnetwork were $1.3 billion, a decrease of 30.0% from thefirst quarter of 2010. Mutual fund redemptions, whichtotalled $1.4 billion for the same period, increased 7.5%from the previous quarter. Net redemptions of Investors

TABLE 7: CHANGE IN MUTUAL FUND ASSETS UNDER MANAGEMENT – INVESTORS GROUP

% change

Three months ended 2010 2010 2009 2010 2009($ millions) june 30 march 31 june 30 march 31 june 30

Sales $ 1,316.1 $ 1,880.2 $ 1,104.9 (30.0)% 19.1%Redemptions 1,419.1 1,319.7 1,199.8 7.5 18.3

Net sales (redemptions) (103.0) 560.5 (94.9) n/m (8.5)Market and income (3,652.2) 1,008.1 6,018.5 n/m n/m

Net change in assets (3,755.2) 1,568.6 5,923.6 n/m n/mBeginning assets 59,223.6 57,655.0 46,574.5 2.7 27.2

Ending assets $ 55,468.4 $ 59,223.6 $ 52,498.1 (6.3)% 5.7%

Average daily assets $ 57,862.8 $ 57,742.9 $ 50,433.1 0.2 % 14.7%

Six months ended 2010 2009($ millions) june 30 june 30 % change

Sales $ 3,196.3 $ 2,531.7 26.3%Redemptions 2,738.8 2,317.2 18.2

Net sales 457.5 214.5 113.3Market and income (2,644.1) 4,792.5 n/m

Net change in assets (2,186.6) 5,007.0 n/mBeginning assets 57,655.0 47,491.1 21.4

Ending assets $ 55,468.4 $ 52,498.1 5.7%

Average daily assets $ 57,803.0 $ 48,079.7 20.2%


IGM

FIN

AN

CIA

L IN

C.

C 1 0 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


Group mutual funds for the current quarter were$103 million compared with net sales of $560 millionin the previous quarter. Sales of long-term funds were$1.1 billion for the current quarter, compared with$1.7 billion in the previous quarter, a decrease of32.1%. Net redemptions of long-term funds for thecurrent quarter were $56 million compared to net salesof $565 million in the previous quarter. First quartersales and net sales during the RRSP season are generallysignificantly higher than those in the second quarter.

Investors Group’s mutual fund assets undermanagement were $55.5 billion at June 30, 2010, asshown in Table 7. The decrease in mutual fund assetsfor the second quarter of 2010 of $3.8 billion wascomprised of $103 million in net redemptions and$3.7 billion of net market depreciation resulting fromdeclines in global stock markets in the latter part of thesecond quarter of 2010. Average mutual fund assetswere $57.9 billion in the second quarter of 2010compared to $57.7 billion in the first quarter.

OTHER PRODUCTS AND SERVICES

Segregated FundsIn November 2009, Investors Group expanded itsoffering of Great-West Life segregated funds bylaunching a new line of segregated fund policies knownas Guaranteed Investment Funds (GIFs). The GIFoffering includes 14 segregated fund-of-fund portfoliosand 6 segregated funds. These funds offer an enhancedselection of death benefit and maturity guarantees andalso include a new Lifetime Income Benefit (LIB)protection feature on select GIFs. The investmentcomponents of these segregated funds are managed byInvestors Group. At June 30, 2010, total segregatedfund assets were $662 million.

InsuranceInvestors Group distributes insurance products throughI.G. Insurance Services Inc. For the three months endedJune 30, 2010, sales of insurance products as measuredby new annualized premiums were $14.2 million, anincrease of 10.1% over $12.9 million in 2009. For thesix months ended June 30, 2010, sales of insuranceproducts were $27.3 million, an increase of 21.8% over$22.4 million in 2009.

Securities OperationsInvestors Group provides securities services to clientsthrough Investors Group Securities Inc. At June 30,2010, total assets under administration were $5.5 billion.

Mortgage Operations Clients who are seeking residential mortgages arereferred to Investors Group mortgage planningspecialists who originate mortgages in key residentialmarkets. For the three months ended June 30, 2010,mortgage originations were $402 million compared with$377 million in 2009. For the six months ended June 30,2010, mortgage originations were $687 million comparedwith $631 million in 2009. At June 30, 2010, mortgagesserviced by Investors Group totalled $7.5 billion comparedto $7.3 billion at December 31, 2009.

Through its mortgage banking operations, residentialmortgages are funded through sales to the InvestorsMortgage and Short Term Income Fund, securitizationprograms, and institutional investors. The Company isa CMHC-approved issuer of National Housing ActMortgage-Backed Securities (NHA MBS) and seller ofNHA MBS into the Canada Mortgage Bond Program(CMB Program). Securitization programs the firmparticipates in also include certain bank-sponsoredasset-backed commercial paper programs. Residentialmortgages are also held by Investors Group’sintermediary operations.

Solutions Banking†

Investors Group’s Solutions Banking† initiative continuesto experience high rates of utilization by Consultantsand clients. The offering consists of a wide range ofproducts and services provided by the National Bank ofCanada under a long-term distribution agreement andincludes: investment loans, lines of credit, personalloans, creditor insurance, deposit accounts and creditcards. Clients have access to a network of bankingmachines, as well as a private labeled client website andprivate labeled client service centre. The SolutionsBanking† offering supports Investors Group’s approachto delivering total financial solutions for our clients viaa broad financial planning platform.

Additional Products and Services Investors Group also provides its clients withguaranteed investment certificates offered by InvestorsGroup Trust Co. Ltd., as well as a number of otherfinancial institutions.


IGM

FINA

NC

IAL IN

C.

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 C 1 1


Review of Segment Operating Results

Investors Group’s earnings before interest and taxes arepresented in Table 8.

Effective January 1, 2010, certain items werereclassified as follows:• The Company’s proportionate share of earnings of

Great-West Lifeco Inc. (Lifeco) and realized gains andlosses on the sale of equity securities were reclassifiedto the Corporate and Other segment. Previously theseamounts were recorded in Net investment income andother in the Investors Group Segment.

• Interest expense on the $225.0 million of long-termdebt incurred to finance the Company’s investment inLifeco is no longer allocated to the Investors Groupsegment. Previously, the amount was recorded inNet investment income and other in the InvestorsGroup segment. Prior periods have been restated to reflect this

reclassification.

TABLE 8: OPERATING RESULTS – INVESTORS GROUP

% change


RevenuesManagement fees $ 275.7 $ 271.7 $ 237.7 1.5% 16.0%Administration fees 54.7 54.4 51.2 0.6 6.8Distribution fees 44.9 41.8 36.6 7.4 22.7

375.3 367.9 325.5 2.0 15.3Net investment income and other (1.0) 7.9 18.8 (112.7) (105.3)

374.3 375.8 344.3 (0.4) 8.7

ExpensesCommission 68.4 66.4 64.0 3.0 6.9Asset retention bonus and premium 51.8 51.1 45.6 1.4 13.6Non-commission 85.3 82.3 81.7 3.6 4.4

205.5 199.8 191.3 2.9 7.4

Earnings before interest and taxes $ 168.8 $ 176.0 $ 153.0 (4.1)% 10.3%


RevenuesManagement fees $ 547.4 $ 451.6 21.2%Administration fees 109.1 99.2 10.0Distribution fees 86.7 71.7 20.9

743.2 622.5 19.4Net investment income and other 6.9 37.1 (81.4)

750.1 659.6 13.7

ExpensesCommission 134.8 125.6 7.3Asset retention bonus and premium 102.9 90.9 13.2Non-commission 167.6 160.9 4.2

405.3 377.4 7.4

Earnings before interest and taxes $ 344.8 $ 282.2 22.2%


IGM

FIN

AN

CIA

L IN

C.



2010 VS. 2009

Fee IncomeInvestors Group earns management fees for investmentmanagement services provided to its mutual funds, whichdepend largely on the level and composition of mutualfund assets under management. Management fees were$275.7 million in the second quarter of 2010, an increaseof $38.0 million or 16.0% from $237.7 million in 2009.For the six months ended June 30, 2010, managementfees were $547.4 million, an increase of $95.8 million or21.2% from $451.6 million in 2009. The increase inmanagement fees in both periods was primarily due tothe increase of 14.7% and 20.2%, respectively, in averagedaily mutual fund assets as shown in Table 7. For boththe three and six month periods, management fees were191 basis points of average daily mutual fund assetscompared to 189 basis points in 2009. Management feeincome and average management fee rates for all of theperiods under review also reflected the impact ofInvestors Group waiving a portion of the investmentmanagement fees on its money market funds to ensurethat these funds maintained a positive yield. For the threeand six month periods, these waivers totalled $1.8 millionand $3.8 million, respectively, in 2010 compared to$1.7 million and $2.0 million, respectively, in 2009.

Investors Group receives administration fees forproviding administrative services to its mutual fundsand trusteeship services to its unit trust mutual funds.Administration fees totalled $54.7 million in thecurrent quarter compared to $51.2 million a year ago.Administration fees were $109.1 million for the sixmonth period ended June 30, 2010 compared to$99.2 million in 2009. Fee income was impacted by thechange in average daily mutual fund assets undermanagement in 2010 compared with 2009.

Effective October 1, 2007, Investors Group assumedresponsibility for the applicable operating expenses ofthe funds, other than GST/HST and certain specifiedfund costs, in return for a fixed rate administration feeestablished for each fund based on the following criteria: • From October 1, 2007 until December 31, 2009,

and thereafter as was applicable, the funds that existedas at October 1, 2007 were required to pay a monthlyoperating expense adjustment to Investors Group ifthe combined average monthly net assets for all fundsand series that were subject to the administration fee

proposal that was approved by investors onSeptember 28, 2007 fell to a level that was 95% ofthe amount of their total net assets. If it becamepayable, Investors Group was entitled to receive anoperating expense adjustment for that month fromeach of those funds and series in such amount thatwould result in all of those series, collectively, payingan administration fee for the month equal to theadministration fee that would have been payable hadthe monthly net assets equaled 95% of the net assetson October 1, 2007 throughout the month.

• As the applicable mutual fund asset levels as atDecember 31, 2009 were below 95% of the net assetlevels on October 1, 2007, the monthly operatingexpense adjustment continued until the first monthwhere average asset levels exceeded 95% of the netasset levels on October 1, 2007. Average assets in April 2010 exceeded the threshold

referred to above and, as a result, the operating expenseadjustment is no longer applicable.

There were no operating expense adjustmentsincluded in administration fees for the second quarterof 2010 compared to $4.0 million in 2009. For the sixmonth period, operating expense adjustments were$0.6 million in 2010 compared to $10.0 million in 2009.

Distribution fees are earned from:• Redemption fees on mutual funds sold with a

deferred sales charge. • Distribution of insurance products through I.G.

Insurance Services Inc.• Securities trading services provided through

Investors Group Securities Inc.• Banking services provided through Solutions

Banking†, an arrangement with the National Bankof Canada.Distribution fee income of $44.9 million for the

second quarter of 2010 increased by $8.3 million from$36.6 million in 2009. For the six month period,distribution fees of $86.7 million increased by$15.0 million from $71.7 million in 2009. Distributionfee income from insurance and banking products andfrom securities services increased in both the three andsix month periods. Redemption fee income increased by$2.2 million to $12.4 million in the second quarter of2010 compared to 2009. For the six month period,redemption fee income increased by $4.4 million to


IGM

FINA

NC

IAL IN

C.



$24.3 million. Redemption fee income may varydepending on the level of deferred sales chargeattributable to fee-based redemptions.

Net Investment Income and OtherAs discussed, certain items previously reported in Netinvestment income and other have been reclassified.Prior periods have been restated to reflect thesereclassifications.

Net investment income and other includes incomerelated to mortgage banking activities as well as interestearned on cash and cash equivalents, securities andmortgage loans related to intermediary operations.Investors Group reports net investment income as thedifference between investment income and interestexpense. Interest expense includes interest on depositliabilities and interest on bank indebtedness, if any.

Net investment income and other was a loss of$1.0 million in the second quarter of 2010, a decreaseof $19.8 million from income of $18.8 million in 2009.For the six months ended June 30, 2010, net investmentincome and other totalled $6.9 million, a decrease of$30.2 million from $37.1 million in 2009.

The decreases in net investment income and otherin both periods related primarily to Investors Group’smortgage banking operations and resulted from:• Gains realized on mortgage sales activity decreased

by $16.7 million and $21.5 million in the three andsix month periods ended June 30, 2010 compared tothe same periods in 2009. The decline in gains was aresult of lower margins on mortgage sales madeduring 2010 that were below historical averages, inrelation to margins experienced on sales made in thefirst half of 2009 that were above historical averages.

• Lower favourable non-cash fair value adjustments tothe retained interest receivable, which declined by$1.8 million and $9.4 million in the three and sixmonth periods ended June 30, 2010 compared to thesame periods in 2009. These fair value adjustmentsresulted from lower credit spreads on asset-backedcommercial paper structures.

ExpensesInvestors Group incurs commission expense inconnection with the distribution of its mutual funds andother financial services and products. Commissions arepaid on the sale of these products and fluctuate with thelevel of sales. Commissions paid on the sale of mutual

funds are deferred and amortized over a period of sixyears. Commission expense for the second quarter of2010 increased by $4.4 million to $68.4 millioncompared with $64.0 million in 2009. For the six monthperiod ended June 30, 2010, commission expenseincreased by $9.2 million to $134.8 million comparedwith $125.6 million in 2009.

The asset retention bonus (ARB) and premium(ARP) expenses, which are based on the level of assetsunder management, are comprised of the following:• ARB, which is paid monthly and is based on the value

of assets under management. ARB expense increasedby $6.0 million and $11.4 million for the three andsix month periods ended June 30, 2010 to $43.9 millionand $87.0 million, respectively, compared to 2009.The increases were primarily as a result of changesin average assets under management.

• ARP, which is a deferred component of compensationdesigned to promote Consultant retention and isbased on assets under management at each year-end.ARP expense increased by $0.2 million and$0.6 million in the three and six month periods to$7.9 million and $15.9 million, respectively,compared to 2009.Non-commission expenses include costs incurred by

Investors Group related to Consultant network support,the administration, marketing and management of itsmutual funds and other products, as well as otherexpenses. Non-commission expenses were $85.3 millionfor the second quarter of 2010 compared to $81.7 millionin 2009. For the six month period, non-commissionexpenses were $167.6 million compared to $160.9 millionin 2009.

The change in non-commission expenses reflectsInvestors Group’s strategy of maximizing returns onbusiness investments that have direct benefits to clientsand Consultants while controlling expenditures andincreasing efficiencies as follows:• Investors Group’s Consultant network continued to

grow during the six months ended June 30, 2010. Asa result, expenses related to recruiting, training, fieldsupport and region office expansion increased inboth of the three and six month periods of 2010compared to the same periods in 2009.

• Sub-advisory fees increased in the three and sixmonth periods of 2010 compared to the same


IGM

FIN

AN

CIA

L IN

C.



periods in the prior year, resulting from increases inrelated assets.

• Non-commission expenses, excluding those relateddirectly to growth and support of the Consultantnetwork, as noted above, decreased in both the threeand six month periods in 2010 compared with 2009.

Q2 2010 VS. Q1 2010

Fee IncomeManagement fee income increased by $4.0 million or1.5% to $275.7 million in the second quarter of 2010compared with the first quarter of 2010. There wasone additional calendar day in the second quartercompared to the first quarter which resulted in anincrease in fee income of approximately $3.0 millionin the current quarter. Excluding this increase in feeincome, management fee income in the current quarterincreased consistent with the change in average dailymutual fund assets as shown in Table 7. Managementfee income was 191 basis points of average daily mutualfund assets for both the first and second quarters of2010. Money market fund waivers totalled $1.8 millionin the second quarter of 2010 compared to $2.1 millionin the prior quarter.

Administration fees increased to $54.7 million in thesecond quarter of 2010 from $54.4 million in the firstquarter primarily due to the increase in average dailymutual fund assets under management. There were nofund operating expense adjustments in the second quarterof 2010 compared with $0.6 million in the first quarter.

Distribution fee income of $44.9 million in thesecond quarter of 2010 increased by $3.1 million from$41.8 million in the first quarter. The increase wasprimarily due to distribution fee income from insuranceand banking products in addition to a $0.5 millionincrease in redemption fee income resulting fromhigher redemptions subject to deferred sales charges.

Net Investment Income and OtherNet investment income and other was a loss of$1.0 million in the second quarter of 2010, a decrease of$8.9 million from $7.9 million in the previous quarter.This decrease related primarily to Investors Group’smortgage banking operations due to lower gainsrealized on mortgage sales activity which declined by$5.5 million in the second quarter of 2010 combinedwith the impact of increased prepayment activity.

ExpensesCommission expense in the current quarter was$68.4 million compared with $66.4 million in theprevious quarter primarily due to increases in thecommissions of other financial services and products.

The asset retention bonus (ARB) and asset retentionpremium (ARP) expense increased by $0.7 million to$51.8 million in the second quarter of 2010.

Non-commission expenses increased $3.0 million to$85.3 million in the second quarter of 2010 comparedwith the first quarter. Non-commission expenses,excluding seasonal expenses directly related to theConsultant network and to the mutual fund operations,decreased marginally in the second quarter of 2010.


IGM

FINA

NC

IAL IN

C.



MACKENZIE STRATEGY

Mackenzie strives to ensure that the interests ofshareholders, dealers, advisors, investment clients andemployees are closely aligned. Mackenzie’s businessapproach embraces current trends and practices in theglobal financial services industry and our strategic planis focused on: 1. The delivery of consistent long-term investment

results.2. Offering a diversified suite of investment solutions

for financial advisors and investors.3. Continuing to build and solidify our distribution

relationships. 4. Maximizing returns on business investment by

focusing resources on initiatives that have directbenefits to investment management, distribution andclient service.Founded in 1967, Mackenzie continues to build an

investment advisory business through proprietaryinvestment research and portfolio management whileutilizing strategic partners in a selected sub-advisorycapacity. Our sales model focuses on multiple thirdparty distribution channels engaged in the provision offinancial advice to investors. This approach is particularlyrelevant in the current economic environment asinvestors look for assistance in positioning theirfinancial plans for the near and long terms. We arecommitted to continuing to partner with the advicechannel going forward.

Mackenzie distributes its retail investment productsthrough third party financial advisors. Mackenzie’swholesale teams work with many of the more than30,000 independent financial advisors across Canada.To support sales into institutional and specialty markets,Mackenzie also deploys specialty teams to distribute itsinvestment advisory capabilities and products in thehigh net worth, group plans, sub-advisory, structuredproducts and institutional areas.


The changes in assets under management aresummarized in Table 9.

Long-term investment performance is a key measureof Mackenzie’s ongoing success. At June 30, 2010, 62%of Mackenzie’s mutual funds were rated in the top twoperformance quartiles for the one year time frame, 65%

for the three year time frame and 59% for the fiveyear time frame. Mackenzie also monitors its fundperformance relative to the ratings it receives on itsmutual funds from the Morningstar† fund rankingservice. At June 30, 2010, 83% of Mackenzie’s mutualfund assets measured by Morningstar† had a rating ofthree stars or better and 48% had a rating of four orfive stars.

On April 26, 2010, Mackenzie completed the secondclosing of its initial public offering of MSP* 2010Resource Limited Partnership.

2010 vs. 2009 Mackenzie’s total assets under management at June 30,2010 were $60.9 billion, an increase of 5.3% from$57.8 billion at June 30, 2009. Mackenzie’s mutual fundassets under management were $38.9 billion at June 30,2010, an increase of 4.3% from $37.2 billion at June 30,2009. Mackenzie’s sub-advisory, institutional and otheraccounts at June 30, 2010 were $22.0 billion, a 7.2%increase from $20.5 billion last year.

In the three months ended June 30, 2010, Mackenzie’sgross sales were $3.3 billion, a decrease of 1.5% from$3.4 billion in the comparative period last year.Redemptions in the current period were $3.9 billion,relatively unchanged compared to 2009. Netredemptions for the three months ended June 30, 2010were $0.5 billion, unchanged from last year. During thecurrent quarter, market and income resulted in assetsdecreasing by $3.5 billion as compared to an increase of$5.7 billion in 2009.

In the six months ended June 30, 2010, Mackenzie’sgross sales were $6.6 billion, an increase of 5.1% from$6.3 billion in the comparative period last year.Redemptions in the current period were $7.0 billion ascompared to redemptions of $7.1 billion in 2009. Netredemptions for the six months ended June 30, 2010were $0.4 billion, as compared to net redemptions of$0.8 billion last year. During the current period, marketand income resulted in assets decreasing by $2.3 billionas compared to an increase of $4.0 billion in 2009.

In the three and six month periods ended June 30,2010, gross sales were higher by $0.5 billion andredemptions were higher by $0.4 billion as a result of arebalance transaction by an institutional investor.

Redemptions of long-term mutual funds in the sixmonths ended June 30, 2010 were $3.3 billion as

MackenzieReview of the Business


IGM

FIN

AN

CIA

L IN

C.



compared to redemptions of $2.4 billion in 2009. As atJune 30, 2010, Mackenzie’s twelve-month trailingredemption rate for long-term funds was 15.7%, ascompared to 17.3% last year. The average twelve-monthtrailing redemption rate for long-term funds for all othermembers of IFIC decreased to approximately 15.0% atJune 30, 2010 from 16.4% last year. Mackenzie’stwelve-month trailing redemption rate is comprised of

the weighted average redemption rate for front-endload assets, deferred sales charge and low load unitswith redemption fees, and matured deferred salescharge units without redemption fees (matured units).Generally, redemption rates for front-end load unitsand matured units are higher than the redemption ratesfor deferred sales charge and low load units withredemption fees.

TABLE 9: CHANGE IN ASSETS UNDER MANAGEMENT – MACKENZIE

% change


Sales $ 3,343.3 $ 3,227.5 $ 3,392.6 3.6 % (1.5)%Redemptions 3,859.6 3,126.6 3,927.5 23.4 (1.7)

Net sales (redemptions) (516.3) 100.9 (534.9) n/m 3.5Market and income (3,453.9) 1,176.9 5,731.9 n/m n/m

Net change in assets (3,970.2) 1,277.8 5,197.0 n/m n/mBeginning assets 64,857.2 63,579.4 52,601.6 2.0 23.3

Ending assets $ 60,887.0 $ 64,857.2 $ 57,798.6 (6.1)% 5.3 %

Consists of:Mutual funds $ 38,867.3 $ 41,331.2 $ 37,249.1 (6.0)% 4.3 %Sub-advisory, institutional

and other accounts 22,019.7 23,526.0 20,549.5 (6.4) 7.2

$ 60,887.0 $ 64,857.2 $ 57,798.6 (6.1)% 5.3 %

Daily average mutual fund assets $ 40,431.5 $ 40,533.2 $ 35,997.7 (0.3)% 12.3 %

Monthly average total assets(1) $ 63,406.3 $ 63,600.4 $ 56,026.5 (0.3)% 13.2 %


Sales $ 6,570.8 $ 6,252.1 5.1 %Redemptions 6,986.2 7,086.2 (1.4)

Net redemptions (415.4) (834.1) 50.2Market and income (2,277.0) 3,972.2 n/m

Net change in assets (2,692.4) 3,138.1 n/mBeginning assets 63,579.4 54,660.5 16.3

Ending assets $ 60,887.0 $ 57,798.6 5.3 %

Daily average mutual fund assets $ 40,482.1 $ 34,884.3 16.0 %

Monthly average total assets(1) $ 63,430.9 $ 54,278.1 16.9 %

(1)Based on daily average mutual fund assets and month-end average sub-advisory, institutional and other assets.


IGM

FINA

NC

IAL IN

C.



Q2 2010 vs. Q1 2010 Mackenzie’s total assets under management at June 30,2010 were $60.9 billion, a decrease of 6.1% from$64.9 billion at March 31, 2010 as summarized in Table9. Mackenzie’s mutual fund assets under managementdecreased $2.5 billion to $38.9 billion in the quarterand Mackenzie’s sub-advisory, institutional and otheraccounts decreased $1.5 billion to $22.0 billion atJune 30, 2010.

Redemptions of long-term mutual fund assets inthe current quarter were $1.7 billion as compared to$1.6 billion in the quarter ended March 31, 2010.Mackenzie’s annualized quarterly redemption rate forlong-term funds for the quarter ended June 30, 2010was 17.0%, as compared to 16.6% in the first quarterof 2010.

Mackenzie’s earnings before interest and taxes arepresented in Table 10.

2010 VS. 2009

Fee and Net Investment Income and OtherMackenzie’s management fee revenues are earned fromservices it provides as fund manager to the Mackenziemutual funds and as investment advisor to sub-advisoryand institutional accounts. The majority of Mackenzie’smutual fund assets are purchased on a retail basis.Mackenzie also offers various series of its mutual fundswith management fees that are designed for fee-basedprograms, institutional investors and third partyinvestment programs offered by banks, insurancecompanies and investment dealers. On these series ofits mutual funds, Mackenzie does not pay trailingcommissions or selling commissions. At June 30, 2010,there were $8.9 billion of mutual fund assets in these seriesof funds, as compared to $7.6 billion at June 30, 2009.

Management fees were $170.7 million for the threemonths ended June 30, 2010, an increase of $17.2 millionor 11.2% from $153.5 million last year. For the six monthperiod ended June 30, 2010, management fees were$340.0 million, an increase of $42.7 million or 14.4% from$297.3 million in 2009. The increase in managementfees was due to the change in Mackenzie’s monthlyaverage total assets under management combined withthe change in the mix of assets under management.

Monthly average total assets under managementwere $63.4 billion in the three month period endedJune 30, 2010 compared to $56.0 billion in 2009, anincrease of 13.2%. Monthly average total assets under

management for the six month period ended June 30,2010 were $63.4 billion compared to $54.3 billion in2009, an increase of 16.9%.

Mackenzie’s average management fee rate was 108.0basis points in the three month period ended June 30,2010 and 108.1 basis points in the six month periodended June 30, 2010, compared to 109.9 basis points and110.5 basis points respectively in 2009. The decrease inthe average management fee rate as compared to 2009was due to the relative change in Mackenzie’sinstitutional accounts and in its non-retail mutual fundsrelative to the change in its retail mutual funds asinstitutional assets and non-retail mutual funds havelower management fees. Changes in asset mixrepresenting the relative proportion of equity and fixedincome assets under management also affect averagemanagement fee rates. In addition, due to the lowinterest rate environment in the current year, Mackenziewaived a portion of its management fees on its moneymarket funds in order to maintain positive net returnsfor investors in these funds. In the three month and sixmonth periods ended June 30, 2010, Mackenzie waivedmanagement fees of $1.8 million and $4.1 millionrespectively on its money market funds as compared to$0.9 million and $1.7 million in 2009.

Administration fees include the following maincomponents:• Administration fees for providing services to the

Mackenzie mutual funds and structured products. • Asset allocation fees.• Trustee and other administration fees generated

from the MRS account administration business.

Review of Segment Operating Results


IGM

FIN

AN

CIA

L IN

C.



TABLE 10: OPERATING RESULTS – MACKENZIE

% change


RevenuesManagement fees $ 170.7 $ 169.3 $ 153.5 0.8% 11.2%Administration fees 33.1 32.7 35.2 1.2 (6.0)Distribution fees 6.2 6.5 6.5 (4.6) (4.6)

210.0 208.5 195.2 0.7 7.6Net investment income and other 3.0 3.4 3.5 (11.8) (14.3)

213.0 211.9 198.7 0.5 7.2

ExpensesCommission 29.1 28.2 29.5 3.2 (1.4)Trailing commission 45.6 45.4 39.9 0.4 14.3Non-commission 67.2 69.3 68.2 (3.0) (1.5)

141.9 142.9 137.6 (0.7) 3.1

Earnings before interest and taxes $ 71.1 $ 69.0 $ 61.1 3.0% 16.4%


RevenuesManagement fees $ 340.0 $ 297.3 14.4%Administration fees 65.8 69.0 (4.6)Distribution fees 12.7 13.1 (3.1)

418.5 379.4 10.3Net investment income and other 6.4 6.8 (5.9)

424.9 386.2 10.0

ExpensesCommission 57.3 58.3 (1.7)Trailing commission 91.0 77.2 17.9Non-commission 136.5 138.3 (1.3)

284.8 273.8 4.0


Administration fees were $33.1 million for thethree months ended June 30, 2010, as compared to$35.2 million in 2009. Administration fees were$65.8 million for the six months ended June 30, 2010,as compared to $69.0 million in 2009.

Effective August 1, 2007, Mackenzie assumedresponsibility for the applicable operating expenses ofthe Mackenzie funds, other than GST/HST and certain

specified fund costs, in return for a fixed rateadministration fee established for each fund based onthe following criteria: • From August 1, 2007 until December 31, 2009, and

thereafter as may be applicable, the funds thatexisted as at August 1, 2007 may be required to paya monthly operating expense adjustment to Mackenzieif the combined average monthly net assets for all


IGM

FINA

NC

IAL IN

C.



Mackenzie funds and series that were subject to theadministration fee proposal that was approved byinvestors on August 7, 2007 fall to a level that is95% of the amount of their total net assets. If itbecomes payable, Mackenzie will be entitled toreceive an operating expense adjustment for thatmonth from each of those funds and series in suchamount that will result in all of those series,collectively, paying an administration fee for themonth equal to the administration fee that wouldhave been payable had the monthly net assetsequaled 95% of the net assets on August 1, 2007throughout the month.

• As the applicable mutual fund asset levels as atDecember 31, 2009 were below 95% of the net assetlevels on August 1, 2007, the monthly operatingexpense adjustment continues until the first monthwhere average asset levels exceed 95% of the netasset levels on August 1, 2007. If, in a subsequentmonth, the monthly net assets increase to an amountequal to or greater than 95% of the net assets onAugust 1, 2007, the operating expense adjustmentwill no longer be payable.Due to the level of mutual fund assets, Mackenzie

continued to receive an operating expense adjustment inthe current period. Included in administration fees wereoperating expense adjustments of $3.3 million in thethree months ended June 30, 2010 and $6.5 million inthe six months ended June 30, 2010, compared to$6.7 million and $14.3 million respectively in 2009.

Mackenzie earns distribution fee income onredemptions of mutual fund units sold on a deferredsales charge basis and on a low load basis. Distributionfees charged for deferred sales charge assets range from5.5% in the first year and decrease to zero after sevenyears. Distribution fees for low load assets range from3.0% in the first year and decrease to zero after threeyears. Distribution fee income in the three monthsended June 30, 2010 was $6.2 million, a decrease of$0.3 million from $6.5 million last year. Distributionfee income in the six months ended June 30, 2010was $12.7 million, a decrease of $0.4 million from$13.1 million in 2009.

The primary component of net investment incomeand other is the net interest margin from M.R.S. TrustCompany’s lending and deposit-taking operations. Net

investment income in the three months ended June 30,2010 was $3.0 million, a decrease of $0.5 million from$3.5 million in 2009. Net investment income in the sixmonths ended June 30, 2010 was $6.4 million, adecrease of $0.4 million from $6.8 million in thecomparative period last year.

ExpensesMackenzie’s expenses were $141.9 million for the threemonths ended June 30, 2010 compared to $137.6 millionlast year. Expenses for the six months ended June 30,2010 were $284.8 million, an increase of $11.0 millionor 4.0% from $273.8 million in 2009.

Mackenzie pays selling commissions to the dealersthat sell its mutual funds on a deferred sales charge andlow load basis. Commission expense, which representsthe amortization of selling commissions, was $29.1 millionin the three months ended June 30, 2010, as comparedto $29.5 million last year. Commission expense in thesix months ended June 30, 2010 was $57.3 million ascompared to $58.3 million in 2009. Mackenzie amortizesselling commissions over three years from the date oforiginal purchase of the applicable low load units andover a maximum period of seven years from the dateof original purchase of the applicable deferred salescharge units.

Trailing commissions paid to dealers are calculated asa percentage of mutual fund assets under managementand vary depending on the fund type and the basis uponwhich the fund was purchased: front-end, deferred salescharge or low load basis. Trailing commissions aregenerally not paid on non-retail series of mutual fundsand institutional assets. Trailing commissions paid todealers were $45.6 million in the three months endedJune 30, 2010, an increase of $5.7 million or 14.3%from $39.9 million last year. Trailing commissions inthe six months ended June 30, 2010 were $91.0 million,an increase of $13.8 million or 17.9% from $77.2 millionin the comparative period last year. The change intrailing commissions in both the three and six monthperiods ended June 30, 2010 is consistent with theperiod over period movement in average mutual fundassets under management and the change in asset mixwithin Mackenzie’s mutual funds. Trailing commissionsas a percentage of average mutual fund assets undermanagement were 45.2 basis points in the three monthsended June 30, 2010 and 45.3 basis points in the six


IGM

FIN

AN

CIA

L IN

C.



months ended June 30, 2010, as compared to 44.5 basispoints and 44.6 basis points respectively last year.

Non-commission expenses include costs incurred byMackenzie related to the administration, marketing andmanagement of its assets under management, as well ascosts incurred in its account administration and trustcompany businesses. Non-commission expenses were$67.2 million in the three months ended June 30, 2010,a decrease of $1.0 million or 1.5% from $68.2 millionlast year. Non-commission expenses in the six monthsended June 30, 2010 were $136.5 million, a decrease of$1.8 million or 1.3% from $138.3 million in thecomparative period last year. Mackenzie activelymanages its non-commission expenses to enhance itsfuture operating capabilities while at the same timeselectively investing in revenue generating initiatives tofurther grow its business.

Q2 2010 VS. Q1 2010

Fee and Net Investment Income and OtherManagement fees were $170.7 million for the currentquarter, an increase of $1.4 million or 0.8% from$169.3 million in the first quarter of 2010.

Monthly average total assets under managementwere $63.4 billion in the current quarter compared to$63.6 billion in the quarter ended March 31, 2010, adecrease of 0.3%. Mackenzie’s average management feerate was 108.0 basis points in the current quarterunchanged from the first quarter of 2010. In the threemonths ended June 30, 2010, Mackenzie waivedmanagement fees of $1.8 million on its money marketfunds as compared to $2.3 million in the three monthsended March 31, 2010. In addition, there was oneadditional calendar day in the second quarter than inthe first quarter of 2010. This difference resulted in

an increase in management fees of approximately$1.7 million in the current quarter on a comparative basis.

Administration fees were $33.1 million in the currentquarter compared to $32.7 million in the quarter endedMarch 31, 2010. Included in administration fees for thecurrent quarter were fund operating expense adjustmentsof $3.3 million as compared to $3.2 million in the firstquarter of 2010.

ExpensesMackenzie’s expenses were $141.9 million for thecurrent quarter, a decrease of $1.0 million or 0.7% from$142.9 million in the first quarter of 2010.

Commission expense, which represents theamortization of selling commissions, was $29.1 millionin the quarter ended June 30, 2010, as compared to$28.2 million in the first quarter of 2010.

Trailing commissions paid to dealers were $45.6 millionin the current quarter, an increase of $0.2 million or0.4% from $45.4 million in the first quarter of 2010.The increase in trailing commissions is consistent withthe change in asset mix within Mackenzie’s mutualfunds. Trailing commissions as a percentage of averagemutual fund assets under management were 45.2 basispoints in the current quarter and 45.4 basis points inthe quarter ended March 31, 2010.

Non-commission expenses were $67.2 million in thecurrent quarter, a decrease of $2.1 million or 3.0% fromthe first quarter of 2010. Non-commission expensesinclude costs incurred by Mackenzie related to theadministration, marketing and management of its assetsunder management, as well as costs incurred in itsaccount administration and trust company businesses.Mackenzie’s non-commission expenses tend to behigher in the first quarter of the year as compared tothe other quarters due to the general increase in salesactivities and transaction volumes.


IGM

FINA

NC

IAL IN

C.



The Corporate and Other segment includes netinvestment income earned on unallocated investments(investments not allocated to the Investors Group orMackenzie segments) and other income, operatingresults for Investment Planning Counsel, as well asinter-segment eliminations. Effective January 1, 2010,the Company’s proportionate share of earnings ofLifeco as well as realized gains and losses on the sale ofequity securities were reclassified to the Corporate andother segment from the Investors Group segment andare recorded in Net investment income and other. Priorperiods have been restated to reflect this reclassification.

Corporate and other earnings before interest andtaxes are presented in Table 11.

2010 VS. 2009

Net investment income and other increased by$4.0 million in the second quarter of 2010 comparedwith 2009 due to an increase of $6.8 million in theCompany’s proportionate share of Lifeco’s earnings asreflected in the Consolidated Financial Position sectionof this MD&A.

This increase was offset in part by decreases of$2.5 million in net investment income on unallocatedinvestments, primarily due to lower dividend incomeand a decrease of $0.5 million in net gains on the sale ofequity securities.

Corporate and OtherReview of Segment Operating Results

TABLE 11: OPERATING RESULTS – CORPORATE AND OTHER

% change


RevenuesFee income $ 31.3 $ 34.7 $ 27.9 (9.8)% 12.2%Net investment income and other 24.7 27.0 20.7 (8.5) 19.3

56.0 61.7 48.6 (9.2) 15.2

ExpensesCommission 20.4 23.4 18.3 (12.8) 11.5Non-commission 8.8 9.2 8.4 (4.3) 4.8

29.2 32.6 26.7 (10.4) 9.4

Earnings before interest and taxes $ 26.8 $ 29.1 $ 21.9 (7.9)% 22.4%


RevenuesFee income $ 66.0 $ 56.8 16.2%Net investment income and other 51.7 51.9 (0.4)

117.7 108.7 8.3

ExpensesCommission 43.8 37.7 16.2Non-commission 18.0 17.6 2.3

61.8 55.3 11.8



IGM

FIN

AN

CIA

L IN

C.



Net investment income and other decreased by$0.2 million in the six months ended June 30, 2010compared with 2009 resulting from:• A decrease of $1.0 million in the Company’s

proportionate share of Lifeco’s earnings as reflectedin the Consolidated Financial Position section ofthis MD&A.

• A decrease of $5.1 million in net investment incomeon unallocated investments primarily due to lowerdividend income resulting from the decline in theCompany’s available for sale equity securitiesportfolio in the first quarter of 2010.

• An increase of $2.3 million in net gains on the saleof equity securities which totalled $6.5 million in2010 compared to $4.2 million in 2009.

• A negative fair value adjustment of $3.7 millionrelated to the Company’s holdings of non-bank-sponsored asset-backed commercial paper (ABCP)recorded in the first quarter of 2009.Earnings before interest and taxes related to

Investment Planning Counsel were $1.4 million higher

in the second quarter of 2010 compared to 2009 and$3.0 million higher for the six months ended June 30,2010. The increase in earnings was primarilyattributable to higher average mutual fund assets undermanagement and higher net distribution revenues.

Q2 2010 VS. Q1 2010

Net investment income and other decreased by$2.3 million in the second quarter of 2010 comparedwith the previous quarter. Net gains on the sale ofequity securities totalled $0.5 million in the secondquarter of 2010 compared to $5.9 million in the firstquarter. This decrease was offset by increases in otherincome related to the seasonality of certain fees.

Earnings before interest and taxes related toInvestment Planning Counsel remained unchanged inthe second quarter of 2010 compared with theprevious quarter.


IGM

FINA

NC

IAL IN

C.



IGM Financial’s total assets were $8.6 billion at June 30,2010, unchanged from December 31, 2009.

SECURITIES

The composition of the Company’s securities holdingsis detailed in Table 12.

Available for Sale (AFS) Securities Securities classified as available for sale include equitysecurities, investments in proprietary investment fundsand fixed income securities. Unrealized gains and losseson available for sale securities are recorded in Othercomprehensive income until they are realized or untilmanagement determines that there is objective evidenceof impairment in value that is other than temporary, atwhich time they are recorded in the ConsolidatedStatements of Earnings.

The fair value of the Company’s common shareholdings was $18.1 million as at June 30, 2010 comparedto $237.1 million at December 31, 2009, a decrease of$219.0 million. The decrease due to net sales of commonshare holdings of $222.1 million in 2010 was offset inpart by increases in the fair value of the portfolio. TheCompany’s exposure to and management of equity pricerisk related to its common share holdings is discussed inthe Financial Instruments section of the MD&A.

The Company holds a diversified portfolio of fixedincome securities totalling $261.6 million at June 30,

2010 which is comprised primarily of bankers’acceptances, Canadian chartered bank senior depositand floating rate notes, government guaranteed short-term investments, and corporate bonds.

Held for Trading SecuritiesSecurities classified as held for trading include CanadaMortgage Bonds and fixed income securities comprisedof non-bank-sponsored asset-backed commercial paper(ABCP). Unrealized gains and losses are recorded inNet investment income and other in the ConsolidatedStatements of Earnings.

As part of the Company’s interest rate riskmanagement activities relating to its mortgage bankingoperations, the Company continued to repurchaseCanada Mortgage Bonds during the six months endedJune 30, 2010, which had previously been sold underrepurchase agreements. These securities weresubsequently sold under similar repurchase agreementswhich represent short-term funding transactions wherethe Company sells securities that it owns and commitsto repurchase these securities at a specified price on aspecified date in the future. These securities had a fairvalue of $634.3 million at June 30, 2010. The obligationto repurchase the securities is recorded at amortizedcost and has a carrying value of $624.2 million. Theinterest expense related to these obligations is recordedon an accrual basis in Net investment income and otherin the Consolidated Statements of Earnings.

IGM Financial Inc.Consolidated Financial Position

TABLE 12: SECURITIES

june 30, 2010 december 31, 2009

($ thousands) cost fair value cost fair value

Available for SaleCommon shares $ 20,755 $ 18,139 $ 236,383 $ 237,085 Proprietary investment funds 34,016 32,763 41,259 41,341 Fixed income securities 260,453 261,562 314,260 315,387

315,224 312,464 591,902 593,813

Held for TradingCanada Mortgage Bonds 647,318 634,255 647,318 624,703 Fixed income securities 31,374 27,674 31,443 27,743

678,692 661,929 678,761 652,446

$ 993,916 $ 974,393 $ 1,270,663 $ 1,246,259


IGM

FIN

AN

CIA

L IN

C.



LOANS

Loans, including mortgages and investment loans,increased by $154.0 million to $825.6 million at June 30,2010 and represented 9.6% of total assets, compared to7.8% at December 31, 2009. Residential mortgage loansrelated to the Company’s mortgage banking operationsincreased by $164.2 million. In the Company’s depositand lending operations, investment loans increased by$0.4 million and residential mortgage loans decreasedby $10.6 million in the six month period.

Residential mortgage loans originated by InvestorsGroup are funded primarily through sales to thirdparties, including CMHC or Canadian bank sponsoredsecuritization trusts, on a fully serviced basis. M.R.S.Trust Company sources mortgage loans and investmentloans through or in cooperation with financial advisors.These loans are funded primarily through theCompany’s deposit operations.

The Company’s exposure to and management of creditrisk and interest rate risk related to its loan portfoliosand its mortgage banking operations is discussed in theFinancial Instruments section of the MD&A.

INVESTMENT IN AFFILIATE

The Company currently has a 4% equity interest inGreat-West Lifeco Inc. (Lifeco), an affiliated company.Both IGM Financial and Lifeco are controlled byPower Financial Corporation.

The equity method is used to account for IGMFinancial’s investment in Lifeco and the Company’s

proportionate share of Lifeco’s earnings is recorded inNet investment income and other in the Corporate andother reportable segment. Changes in the carryingvalue for the three and six month periods ended June 30,2010 compared with the same periods in 2009 areshown in Table 13.

OFF-BALANCE SHEET SECURITIZATION ARRANGEMENTS

Through the Company’s mortgage banking operations,periodic sales of residential mortgages are made tosecuritization trusts sponsored by third parties that inturn issue securities to investors. The Company retainsservicing responsibilities and, in some cases, certainelements of recourse with respect to credit losses ontransferred loans. During the second quarter of 2010,the Company entered into securitization transactionswith Canadian bank-sponsored securitization trusts andthe CMB Program through its mortgage bankingoperations with proceeds of $349.0 million comparedto $398.8 million in the second quarter of 2009 asdiscussed in Note 3 to the interim ConsolidatedFinancial Statements. Securitized loans serviced atJune 30, 2010 totalled $3.3 billion compared with$3.1 billion at June 30, 2009. The fair value of theCompany’s retained interest was $132.2 million atJune 30, 2010 compared to $173.5 million atDecember 31, 2009. Additional information related tothe Company’s securitization activities can be found inthe Financial Instruments section of this MD&A.

TABLE 13: INVESTMENT IN AFFILIATE

three months ended june 30 six months ended june 30

($ millions) 2010 2009 2010 2009

Carrying value, beginning of period $ 596.9 $ 616.7 $ 598.2 $ 574.4 Proportionate share of earnings and other 17.2 10.4 34.9 35.9 Dividends received (11.6) (11.6) (23.2) (23.2)Proportionate share of accumulated other

comprehensive income (loss) and other adjustments (16.8) 1.4 (24.2) 29.8

Carrying value, end of period $ 585.7 $ 616.9 $ 585.7 $ 616.9

Fair value, end of period $ 909.2 $ 855.5 $ 909.2 $ 855.5


IGM

FINA

NC

IAL IN

C.



LIQUIDITY

Cash and cash equivalents totalled $1.11 billion atJune 30, 2010 compared with $945.1 million and$1.28 billion at December 31, 2009 and June 30, 2009,respectively. Cash and cash equivalents include$337.1 million at June 30, 2010 compared with $308.4million and $434.5 million at December 31, 2009 andJune 30, 2009, respectively, related to the Company’sdeposit operations as shown in Table 14.

Net working capital, which totalled $488.5 millionat June 30, 2010, reflected a reduction of $450.0 millionrelated to the 2001 Series, 6.75% debentures which aredue within one year on May 9, 2011. Net workingcapital totalled $834.8 million at December 31, 2009and $981.4 million at June 30, 2009. These amountsexcluded the Company’s cash and cash equivalentsrelated to its deposit operations as shown in Table 14.

Net working capital may be utilized to:• Finance ongoing operations, including the funding

of selling commissions.• Temporarily finance mortgages in its mortgage

banking facility.• Meet regular interest and dividend obligations

related to long-term debt and preferred shares. • Maintain liquidity requirements for regulated entities.• Pay quarterly dividends on its outstanding common

shares.• Finance common share repurchases related to the

Company’s normal course issuer bid.

IGM Financial continues to generate significant cashflows from its operations. Earnings before interest,taxes, depreciation and amortization (EBITDA) totalled$351.6 million in the second quarter of 2010 comparedto $320.0 million in the second quarter of 2009 and$357.6 million in the first quarter of 2010. EBITDAtotalled $709.2 million for the six months ended June 30,2010 compared to $614.6 million in 2009. EBITDA foreach period under review also excludes the impact ofamortization of deferred selling commissions whichtotalled $76.5 million in the second quarter of 2010compared to $75.2 million in the second quarter of2009 and $75.3 million in the first quarter of 2010. Aswell as being an important alternative measure ofperformance, EBITDA as reported by the Company isone of the primary metrics utilized by investmentanalysts and credit rating agencies in reviewing assetmanagement companies.

Refer to the Financial Instruments section of thisMD&A for information related to other sources ofliquidity and to the Company’s exposure to andmanagement of liquidity risk.

Cash FlowsTable 15 – Cash Flows is a summary of the ConsolidatedStatements of Cash Flows which form part of theinterim Consolidated Financial Statements for the threeand six months ended June 30, 2010. Cash and cashequivalents decreased by $62.8 million in the quartercompared with an increase of $42.2 million in the

Consolidated Liquidity and Capital Resources

TABLE 14: ASSETS RELATED TO DEPOSIT OPERATIONS

2010 2009 2009($ millions) june 30 december 31 june 30

AssetsCash and cash equivalents $ 337.1 $ 308.4 $ 434.5Securities 261.6 315.4 275.4Loans 424.7 435.4 450.7

Total assets $ 1,023.4 $ 1,059.2 $ 1,160.6

Liabilities and shareholders’ equityDeposit liabilities $ 862.6 $ 907.4 $ 996.9Other liabilities – net 63.3 54.5 61.5Shareholders’ equity 97.5 97.3 102.2

Total liabilities and shareholders’ equity $ 1,023.4 $ 1,059.2 $ 1,160.6


IGM

FIN

AN

CIA

L IN

C.



second quarter of 2009. For the six month period, cashand cash equivalents increased by $169.2 millioncompared to $45.2 million in 2009.

Operating activities, before payment of commissions,generated $261.6 million and $506.6 million during thethree and six month periods ended June 30, 2010, ascompared to $253.5 million and $452.6 million in 2009.Cash commissions paid were $55.3 million and$136.3 million for the three and six month periods in2010 compared to $47.4 million and $109.0 million,respectively, in 2009. The increases in cash commissionspaid are consistent with the increase in mutual fundsales. Net cash flows from operating activities, net ofcommissions paid, was $206.3 million and $370.3 millionfor the three and six month periods in 2010 as comparedto $206.1 million and $343.6 million, respectively, in 2009.

Financing activities during the second quarter of2010 compared to the same period in 2009 relatedprimarily to:• A net decrease of $38.9 million in deposits and

certificates in 2010 compared to a net decrease of$48.4 million in 2009. The net decrease in 2010related to decreases in demand deposit levels, offsetin part by increases in term deposit levels.

• Net payment of $5.4 million in 2010 arising fromobligations related to assets sold under repurchaseagreements compared to net proceeds of $25.3 millionin 2009.

• Proceeds received on the issuance of commonshares of $2.8 million in 2010 compared to$9.9 million in 2009.

• The purchase of 850,000 common shares in 2010under IGM Financial’s normal course issuer bid at acost of $29.9 million compared to nil in 2009.

• The payment of perpetual preferred share dividendswhich totalled $3.5 million in 2010.

• The payment of regular common share dividendswhich totalled $134.5 million in 2010 unchangedfrom 2009. Financing activities during the six months ended

June 30, 2010 compared to the same period in 2009related primarily to:• A net decrease of $44.7 million in deposits and

certificates in 2010 compared to a net increase of$37.9 million in 2009. The net decrease in 2010related to decreases in demand deposit levels, offsetin part by increases in term deposit levels.

• Net payment of $5.6 million in 2010 arising fromobligations related to assets sold under repurchaseagreements compared to net proceeds of $617.7 millionin 2009.

• Proceeds received on the issuance of common sharesof $16.6 million in 2010 compared with $13.9 millionin 2009.

• The purchase of 1,390,000 common shares in 2010under IGM Financial’s normal course issuer bid at a

TABLE 15: CASH FLOWS

three months ended june 30 six months ended june 30

($ millions) 2010 2009 change 2010 2009 change

Operating activitiesBefore payment of commissions $ 261.6 $ 253.5 3.2% $ 506.6 $ 452.6 11.9%Commissions paid (55.3) (47.4) (16.7) (136.3) (109.0) (25.0)

Net of commissions paid 206.3 206.1 0.1 370.3 343.6 7.8Financing activities (209.4) (59.3) (253.1) (358.1) 487.4 (173.5)Investing activities (59.7) (104.6) 42.9 157.0 (785.8) 120.0

(Decrease) increase in cash andcash equivalents (62.8) 42.2 (248.8) 169.2 45.2 274.3

Cash and cash equivalents, beginning of period 1,177.1 1,235.2 (4.7) 945.1 1,232.2 (23.3)

Cash and cash equivalents, end of period $ 1,114.3 $ 1,277.4 (12.8)% $ 1,114.3 $ 1,277.4 (12.8)%


IGM

FINA

NC

IAL IN

C.



cost of $51.8 million compared with the purchaseof 60,000 common shares at a cost of $1.6 millionin 2009.

• The payment of perpetual preferred share dividendswhich totalled $3.5 million in 2010.

• The payment of regular common share dividendswhich totalled $269.1 million in 2010 compared to$269.0 million in 2009. Financing activities during both the three and six

month periods in 2009 included:• The repayment of the $286.6 million bankers’

acceptances related to the acquisition of SaxonFinancial Inc., and

• Net proceeds received on the issuance of debenturesof $375.0 million. Investing activities during the second quarter of

2010 compared to the same period in 2009 relatedprimarily to:• Purchases of securities totalling $66.7 million and

sales of securities with proceeds of $159.7 million in2010 compared to $379.1 million and $340.4 million,respectively, in 2009.

• Net increases in loans of $496.9 million comparedto $459.2 million in 2009 related primarily toresidential mortgages in the Company’s mortgagebanking operations.

• Net cash proceeds resulting from the securitizationof residential mortgage loans through Canadianbank-sponsored securitization trusts and the CMBProgram of $349.0 million in 2010 compared to$398.8 million in 2009.Investing activities during the six months ended

June 30, 2010 compared to the same period in 2009related primarily to:• Purchases of securities totalling $141.8 million and

sales of securities with proceeds of $464.4 million in2010 compared to $1,040.8 million and $423.2 million,respectively, in 2009. Purchases of securities in2009 included $647.3 million related to CanadaMortgage Bonds.

• Net increases in loans of $703.7 million compared to$777.3 million in 2009 related primarily toresidential mortgages in the Company’s mortgagebanking operations.

• Net cash proceeds resulting from the securitizationof residential mortgage loans through Canadian

bank-sponsored securitization trusts and the CMBProgram of $551.3 million in 2010 compared to$617.2 million in 2009.

CAPITAL RESOURCES

The Company’s capital management objective is tomaximize shareholder returns while ensuring that theCompany is capitalized in a manner which appropriatelysupports regulatory requirements, working capital needsand business expansion. The Company’s capitalmanagement practices are focused on preserving thequality of its financial position by maintaining a solidcapital base and a strong balance sheet. Capital of theCompany consisted of long-term debt, perpetualpreferred shares and common shareholders’ equitywhich totalled $6.0 billion at June 30, 2010, unchangedfrom December 31, 2009. The Company regularlyassesses its capital management practices in response tochanging economic conditions.

The Company’s capital is primarily utilized in itsongoing business operations to support working capitalrequirements, long-term investments made by theCompany, business expansion and other strategicobjectives. Subsidiaries subject to regulatory capitalrequirements include trust companies, securities advisors,securities dealers and mutual fund dealers. Thesesubsidiaries are required to maintain minimum levelsof capital based on either working capital, liquidity orshareholders’ equity. The Company’s subsidiaries havecomplied with all regulatory capital requirements.Certain subsidiaries of the Company will register asInvestment Fund Managers with the applicable securitiescommissions under National Instrument 31-103(NI 31-103) in 2010 and will adjust capital as necessaryto meet the new requirements.

The Company repurchased 1,390,000 commonshares in the six months ended June 30, 2010 at a cost of$51.8 million under the normal course issuer bid (Note4 to the interim Consolidated Financial Statements).The Company commenced a normal course issuer bidon April 12, 2010 to purchase up to 5% of its commonshares in order to provide flexibility to repurchasecommon shares as conditions warrant. Other capitalmanagement activities in 2010 included the declarationof perpetual preferred share dividends of $5.7 million andcommon share dividends of $268.8 million. Changes in


IGM

FIN

AN

CIA

L IN

C.



common share capital are reflected in the interimConsolidated Statements of Changes in Shareholders’Equity. Perpetual preferred shares of $150 million andlong-term debt of $1.6 billion remain unchanged. Thetotal outstanding long-term debt is comprised ofdebentures which are senior unsecured debt obligationsof the Company subject to standard covenants,including negative pledges, but which do not includeany specified financial or operational covenants.

On April 23, 2010 Standard & Poor’s (S&P)reaffirmed its “A+” rating with a stable outlook onIGM Financial’s senior debt and liabilities. The stableoutlook reflects S&P’s view of an improved operatingenvironment in the asset management industry, theCompany’s increased levels of assets under management,its current and likely prospective improvement inprofitability, and the expectation that IGM Financialwill maintain a strong balance sheet.

On January 13, 2010, Dominion Bond RatingService (DBRS) reaffirmed its rating at “A (high)” witha stable outlook.

Credit ratings are intended to provide investors withan independent measure of the credit quality of thesecurities of a company and are indicators of thelikelihood of payment and the capacity of a company tomeet its obligations in accordance with the terms ofeach obligation. Descriptions of the rating categoriesfor each of the agencies set forth below have beenobtained from the respective rating agencies’ websites.

These ratings are not a recommendation to buy, sellor hold the securities of the Company and do notaddress market price, nor other factors that mightdetermine suitability of a specific security for aparticular investor. The ratings also may not reflect thepotential impact of all risks on the value of securitiesand are subject to revision or withdrawal at any time bythe rating organization.

The “A+” rating assigned to the Company’s seniorunsecured debentures by S&P is the third highest ofthe ten major rating categories for long-term debt andindicates S&P’s view that the Company’s capacity tomeet its financial commitment on the obligation isstrong, but the Company is somewhat more susceptibleto the adverse effects of changes in circumstances andeconomic conditions than companies in higher ratedcategories. S&P uses “+” or “-” designations to indicatethe relative standing within the major rating categories.

According to S&P, the “Stable” rating outlookmeans that S&P considers that the rating is unlikely tochange over the intermediate term. A stable outlook isnot necessarily a precursor to an upgrade.

The A (High) rating assigned to IGM Financial’ssenior unsecured debentures by DBRS is the thirdhighest of the ten rating categories for long-term debt.Under the DBRS system, debt securities rated A (High)are of satisfactory credit quality and protection ofinterest and principal is considered substantial. Whilethis is a favourable rating, entities in the A (High)category are considered to be more susceptible toadverse economic conditions and have greater cyclicaltendencies than higher-rated companies. A reference to“high” or “low” reflects the relative strength within therating category, while the absence of either a “high” or“low” designation indicates the rating is placed in themiddle of the category.

According to DBRS, the “Stable” rating trend helpsgive investors an understanding of DBRS’s opinionregarding the outlook for the rating.

FINANCIAL INSTRUMENTS

Table 16 presents the carrying value and the fair valueof financial instruments.

There have been no changes to the methods andassumptions used in determining the fair values asdescribed in Note 19 to the Consolidated FinancialStatements in the 2009 IGM Financial Inc. Annual Report.

Although there were changes to both the carryingvalues and fair values of financial instruments, thesechanges did not have a material impact on the financialcondition of the Company for the six months endedJune 30, 2010. The Company actively manages risksthat arise as a result of holding financial instrumentswhich include liquidity, credit and market risk.

Liquidity RiskLiquidity risk is the risk that the Company cannotmeet a demand for cash or fund its obligations as theycome due. The Company’s liquidity managementpractices include:• Controls over liquidity management processes;• Stress testing of various operating scenarios;• Oversight over liquidity management by

Committees of the Board of Directors.


IGM

FINA

NC

IAL IN

C.



As part of these ongoing liquidity managementpractices during 2010 and 2009, the Company:• Completed a public offering of $375 million

debentures on April 7, 2009 maturing in April 2019;• Completed a public offering of $150 million

perpetual preferred shares on December 8, 2009; • Redeemed $360 million in preferred shares classified

as liabilities on December 31, 2009;• Increased the Company’s committed lines of credit;• Developed additional funding sources for the

Company’s mortgage banking operations;• Reviewed the concentration and diversification

profile of the Company’s cash and cash equivalents;• Reduced the equity component of the Company’s

securities portfolio.A key liquidity requirement for the Company is the

funding of commissions paid on the sale of mutualfunds. The payment of commissions continues to befully funded through ongoing cash flow from operations.

The Company also maintains sufficient liquidity tofund and temporarily hold mortgages. Through itsmortgage banking operations, residential mortgages arefunded through placement with Investors Group’sintermediary operations or through sales to InvestorsMortgage and Short Term Income Fund and to third

parties, including CMHC or Canadian bank sponsoredsecuritization trusts, or through private placements toinstitutional investors. Investors Group is an approvedissuer of NHA MBS and an approved seller into theCMB Program. This issuer and seller status providesInvestors Group with additional funding sources forresidential mortgages (Note 3 to the interimConsolidated Financial Statements). During the first sixmonths of 2010, proceeds from securitizations were$551.3 million and whole loan sales to third partiestotalled $108.6 million, compared with $617.2 millionand $32.3 million, respectively, in 2009.

The Company’s continued ability to fund residentialmortgages through Canadian bank-sponsoredsecuritization trusts and NHA MBS is dependent onsecuritization market conditions that are subject to change.

Liquidity requirements for trust subsidiaries whichengage in financial intermediary activities are based onpolicies approved by committees of their respectiveBoards of Directors. As at June 30, 2010, the trustsubsidiaries’ liquidity was in compliance with these policies.

Contractual obligations have not changed materiallysince March 31, 2010.

In addition to IGM Financial’s current balance ofcash and cash equivalents, other potential sources of

TABLE 16: F INANCIAL INSTRUMENTS

june 30, 2010 december 31, 2009

($ millions) carrying value fair value carrying value fair value

AssetsCash and cash equivalents $ 1,114.3 $ 1,114.3 $ 945.1 $ 945.1 Securities 974.4 974.4 1,246.3 1,246.3 Loans 825.6 827.3 671.6 674.8 Other financial assets 247.5 247.5 267.0 267.0 Derivative assets 95.9 95.9 120.4 120.4

Total financial assets $ 3,257.7 $ 3,259.4 $ 3,250.4 $ 3,253.6

LiabilitiesDeposits and certificates $ 862.6 $ 867.5 $ 907.3 $ 916.1 Repurchase agreements 624.2 624.2 629.8 629.8 Other financial liabilities 587.3 587.3 591.4 591.4 Derivative liabilities 109.6 109.6 112.7 112.7 Long-term debt 1,575.0 1,777.0 1,575.0 1,714.3

Total financial liabilities $ 3,758.7 $ 3,965.6 $ 3,816.2 $ 3,964.3


IGM

FIN

AN

CIA

L IN

C.



liquidity include the Company’s lines of credit andportfolio of securities. The Company’s operating linesof credit with various Schedule I Canadian charteredbanks total $675 million as at June 30, 2010, unchangedfrom December 31, 2009. The operating lines of creditas at June 30, 2010 consist of committed lines of $500million and uncommitted lines of $175 million. As atJune 30, 2010, the Company was not utilizing itscommitted lines of credit or its uncommitted operatinglines of credit.

Management believes cash flows from operations,available cash balances and other sources of liquiditydescribed above will be sufficient to fund the Company’sliquidity needs. The Company continues to have theability to meet its operational cash flow requirements,its contractual obligations, and its declared dividends.The current practice of the Company is to declare andpay dividends to common shareholders on a quarterlybasis at the discretion of the Board of Directors. Thedeclaration of dividends by the Board of Directors isdependent on a variety of factors, including earningswhich are significantly influenced by the performanceof debt and equity markets. The Company’s liquidityposition and its management of liquidity risk have notchanged materially since December 31, 2009.

Credit Risk Credit risk is the potential for financial loss to theCompany if a counterparty in a transaction fails to meetits obligations. The Company’s cash and cash equivalents,securities holdings, mortgage and investment loanportfolios, and derivatives are subject to credit risk. TheCompany monitors its credit risk management practicescontinuously to evaluate their effectiveness.

At June 30, 2010, cash and cash equivalents of$1.11 billion consisted of cash balances of $79.3 millionon deposit with Canadian chartered banks and cashequivalents of $1.04 billion. Cash equivalents arecomprised primarily of Government of Canada treasurybills totalling $118.6 million, provincial governmentand government guaranteed commercial paper of$282.6 million and bankers’ acceptances issued byCanadian chartered banks of $600.2 million. TheCompany regularly reviews the credit ratings of itscounterparties. The maximum exposure to credit riskon these financial instruments is their carrying value.The Company mitigates credit risk on these financial

instruments by adhering to its Investment Policy thatoutlines credit risk parameters and concentration limits.

Available for sale fixed income securities at June 30,2010 are comprised of bankers’ acceptances of$68.1 million, Canadian chartered bank senior depositnotes and floating rate notes of $83.2 million and$35.0 million respectively, government guaranteedshort-term investments of $10.0 million, and corporatebonds and other of $65.3 million. The maximumexposure to credit risk on these financial instruments istheir carrying value. The Company mitigates credit riskon these financial instruments by adhering to itsInvestment Policy that outlines credit risk parametersand concentration limits.

Held for trading fixed income securities are comprisedof non-bank-sponsored ABCP with a fair value of$27.7 million which represents the maximum exposureto credit risk at June 30, 2010. Refer to Note 2 to theinterim Consolidated Financial Statements forinformation related to the valuation of ABCP.

The Company regularly reviews the credit quality ofthe mortgage and investment loan portfolios and theadequacy of the general allowance. As at June 30, 2010,mortgages and investment loans totalled $526.6 millionand $305.7 million, respectively. The allowance for creditlosses of $6.7 million at June 30, 2010 exceeded impairedmortgages and investment loans by $6.3 million. As atJune 30, 2010, the mortgage portfolios weregeographically diverse, 100% residential and 72%insured. The credit risk on the investment loan portfoliois mitigated through the use of collateral, primarily in theform of mutual fund investments. There were nouninsured non-performing loans over 90 days in themortgage and investment loan portfolios at June 30,2010, compared with $0.2 million at December 31, 2009.The characteristics of the mortgage and investment loanportfolios have not changed significantly during 2010.

The Company’s exposure to and management ofcredit risk related to cash and cash equivalents, fixedincome securities and mortgage and investment loanportfolios have not changed materially sinceDecember 31, 2009.

The Company regularly reviews the credit quality ofthe mortgage loans securitized through CMHC orCanadian bank sponsored (Schedule I chartered banks)securitization trusts. The maximum exposure to creditrisk attributable to securitized mortgage loans is equal


IGM

FINA

NC

IAL IN

C.



to the fair value of the retained interests in thesecuritized loans, which was $132.2 million at June 30,2010 compared to $173.5 million at December 31,2009. Retained interests include:• Cash reserve accounts and rights to future excess

spread – which totalled $103.6 million at June 30,2010. The portion of this amount pertaining toCanadian bank-sponsored securitization trusts of$24.7 million is subordinated to the interests of thetrust and represents the maximum exposure to creditrisk for any failure of the borrowers to pay whendue. Credit risk on these mortgages is mitigated byany insurance on these mortgages, as discussedbelow, and the Company’s credit risk on insuredloans is to the insurer. At June 30, 2010, 95% of the$1.5 billion in outstanding mortgages securitizedunder these programs were insured.

Rights to future excess spread under the NHAMBS and CMB Program totalled $78.9 million.Under the NHA MBS and CMB Program, theCompany has an obligation to make timely paymentsto security holders regardless of whether amountsare received by mortgagors. All mortgages securitizedunder the NHA MBS and CMB Program areinsured by CMHC or another approved insurerunder the program, and the Company’s creditexposure is to the insurer. Outstanding mortgagessecuritized under these programs are $1.8 billion.

Since 2008, the Company has purchased portfolioinsurance from CMHC on newly funded qualifyingconventional mortgage loans. During the thirdquarter of 2009, the Company expanded its insurancecoverage on the $5.6 billion mortgage portfoliowhich it services related to its mortgage bankingoperations, including the $3.3 billion securitizedportfolio. This coverage provides the same level ofcredit risk mitigation as insurance on high ratioloans (non-conventional) at the time of application.At June 30, 2010, 95% of the mortgage portfolioserviced by the Company was insured. Uninsurednon-performing loans over 90 days in the securitizedportfolio were $0.6 million at June 30, 2010, comparedto nil at December 31, 2009. The Company’sexpected exposure to credit risk related to cashreserve accounts and rights to future excess spreadwas not significant at June 30, 2010.

• Fair value of interest rate swaps – which the Companyenters into as a requirement of the securitizationprograms in which it participates and which totalled$28.6 million at June 30, 2010. The outstandingnotional amount of these interest rate swaps was$3.5 billion at June 30, 2010 compared to $3.4 billionat December 31, 2009. The exposure to credit risk,which is limited to the fair value of the interest rateswaps which were in a gain position, totalled$59.9 million at June 30, 2010 compared to$75.5 million at December 31, 2009. The Company utilizes interest rate swaps to hedge

interest rate risk related to securitization activitiesdiscussed above. The negative fair value of these interestrate swaps totalled $38.5 million at June 30, 2010. Theoutstanding notional amount was $3.2 billion at June 30,2010 compared to $3.3 billion at December 31, 2009.The exposure to credit risk, which is limited to the fairvalue of the interest rate swaps which are in a gainposition, totalled $36.0 million at June 30, 2010compared to $42.2 million at December 31, 2009.

In addition, the Company enters into otherderivative contracts which consist primarily of interestrate swaps utilized to hedge interest rate risk related tomortgages held, or committed to, by the Company. Theoutstanding notional amount of these derivative contractswas $112.7 million at June 30, 2010 compared to$75.3 million at December 31, 2009. The exposure tocredit risk, which is limited to the fair value of thoseinstruments which were in a gain position, was nil atJune 30, 2010, compared to $2.7 million atDecember 31, 2009.

The aggregate credit risk exposure related toderivatives that are in a gain position of $95.9 milliondoes not give effect to any netting agreements orcollateral arrangements. The exposure to credit risk,giving effect to netting agreements and collateralarrangements, was $59.2 million at June 30, 2010.Counterparties are all bank-sponsored securitizationtrusts and Canadian Schedule I chartered banks and, asa result, management has determined that the Company’soverall credit risk related to derivatives was notsignificant at June 30, 2010. Management of credit riskhas not changed materially since December 31, 2009.

Additional information related to the Company’ssecuritization activities and utilization of derivative


IGM

FIN

AN

CIA

L IN

C.



contracts can be found in Notes 1, 4 and 18 to theConsolidated Financial Statements in the 2009 IGMFinancial Inc. Annual Report.

Market Risk Market risk is the potential for loss to the Companyfrom changes in the values of its financial instrumentsdue to changes in foreign exchange rates, interest ratesor equity prices. The Company’s financial instrumentsare generally denominated in Canadian dollars, and donot have significant exposure to changes in foreignexchange rates.

Interest Rate RiskThe Company is exposed to interest rate risk on its loanportfolio, fixed income securities, Canada MortgageBonds and on certain of the derivative financialinstruments used in the Company’s mortgage bankingand intermediary operations.

The objective of the Company’s asset and liabilitymanagement is to control interest rate risk related to itsintermediary operations by actively managing its interestrate exposure. As at June 30, 2010, the total gap betweenone-year deposit assets and liabilities was within theCompany’s trust subsidiaries’ stated guidelines.

The Company utilizes interest rate swaps withCanadian Schedule I chartered bank counterparties inorder to reduce the impact of fluctuating interest rateson its mortgage banking operations, as follows: • As part of the securitization transactions with bank-

sponsored securitization trusts the Company entersinto interest rate swaps with the trusts which transfersthe interest rate risk to the Company. The Companyenters into offsetting interest rate swaps withSchedule I chartered banks to hedge this risk. Underthese securitization transactions with bank-sponsoredsecuritization trusts the Company is exposed to ABCPrates and, after effecting its interest rate hedgingactivities, remains exposed to the basis risk that ABCPrates are greater than bankers’ acceptances rates.

• As part of the securitization transactions under theCMB Program, the Company enters into interestrate swaps with Schedule I chartered bankcounterparties that transfer the interest rate riskassociated with the program, including reinvestmentrisk, to the Company. To manage these interest rateand reinvestment risks, the Company enters intooffsetting interest rate swaps with Schedule I

chartered bank counterparties to reduce the impactof fluctuating interest rates.

• The Company is exposed to the impact that changesin interest rates may have on the value of itsinvestments in Canada Mortgage Bonds. TheCompany enters into interest rate swaps withSchedule I chartered bank counterparties to hedgeinterest rate risk on these bonds.

• The Company is also exposed to the impact thatchanges in interest rates may have on the value ofmortgages held, or committed to, by the Company.The Company may enter into interest rate swaps tohedge this risk.As at June 30, 2010, the impact to net earnings of a

100-basis point change in interest rates would havebeen approximately $0.2 million. The Company’sexposure to and management of interest rate risk hasnot changed materially since December 31, 2009.

Equity Price RiskThe Company is exposed to equity price risk on itsinvestments in common shares and proprietaryinvestment funds which are classified as available forsale securities as shown in Table 12. Unrealized gainsand losses on these securities are recorded in Othercomprehensive income until they are realized or untilmanagement determines there is objective evidence ofimpairment in value that is other than temporary, atwhich time they are recorded in the ConsolidatedStatements of Earnings.

The Company adheres to an Investment Policy thatoutlines the objectives, constraints and parametersrelating to its investing activities. This policy prescribeslimits around the quality and concentration ofinvestments held by the Company. The Company maymanage its exposure to equity price risk on a portion ofits corporate securities portfolio by using a variety ofderivative instruments including options and forwardcontracts. Management regularly reviews the Company’sinvestments to ensure all activities are in adherence tothe Investment Policy. Proceeds on the sale of commonshares in the six months ended June 30, 2010 totalled$222.1 million. The fair value of the common shareportfolio was $18.1 million at June 30, 2010 comparedto $237.1 million at December 31, 2009. Unrealizedlosses at June 30, 2010 were $2.6 million compared tounrealized gains of $0.7 million at December 31, 2009.


IGM

FINA

NC

IAL IN

C.



Investments in common shares are reviewedperiodically, or more frequently when conditionswarrant, to determine whether there is objectiveevidence of impairment in value that is other thantemporary. Factors that are considered include thelength of time and the extent to which the fair value hasbeen below cost, the financial condition and near termprospects of the issuer, as well as the Company’s intentand ability to hold the investments for a period of timesufficient to allow for any anticipated recovery.

As at June 30, 2010, the impact of a 10% decrease inequity prices would have been a $3.8 million unrealizedloss recorded in Other comprehensive income. TheCompany’s management of equity price risk has notchanged materially since December 31, 2009. However,the Company’s exposure to equity price risk hasdeclined materially since December 31, 2009 as a resultof the reduction in its securities holdings during 2010.

MARKET RISK RELATED TO ASSETS UNDER MANAGEMENT

At June 30, 2010, mutual fund industry assets in Canadawere approximately $648.0 billion, a decrease of 0.8%relative to December 31, 2009.

The Company is subject to the risk of asset volatilityfrom changes in the Canadian and internationalfinancial and equity markets. Changes in these marketshave caused in the past, and will cause in the future,changes in the Company’s assets under management,revenues and earnings. Global economic conditions,exacerbated by financial crises, changes in the equitymarketplace, currency exchange rates, interest rates,inflation rates, the yield curve, defaults by derivativecounterparties and other factors that are difficult topredict affect the mix, market values and levels of assetsunder management.

The funds managed by the Company may be subjectto unanticipated redemptions as a result of such events.Changing market conditions may also cause a shift inasset mix between equity and fixed income assets,potentially resulting in a decline in the Company’srevenue and earnings depending upon the nature of theassets under management and the level of managementfees earned by the Company.

Interest rates at unprecedented low levels havesignificantly decreased the yields of the Company’smoney market and managed yield unit trust andCorporate Class mutual funds. Throughout both 2010and 2009, Investors Group and Mackenzie waived aportion of investment management fees or absorbedsome expenses to ensure that these funds maintainedpositive yields. The Company will review its practices inthis regard in response to changing market conditions.

IGM Financial provides Consultants andindependent financial advisors with a high level ofservice and support and a broad range of investmentproducts based on asset classes, countries or regions,and investment management styles which, in turn,should result in maintaining strong client relationshipsand lower rates of redemptions.

The mutual fund industry and financial advisorscontinue to take steps to educate Canadian investors onthe merits of financial planning, diversification andlong-term investing. In periods of volatility ourConsultants and independent financial advisors play akey role in assisting investors to maintain perspectiveand focus on their long-term objectives.

Redemption rates for long-term funds aresummarized in Table 17 and are discussed in theInvestors Group and Mackenzie Segment OperatingResults sections of the MD&A.

TABLE 17: TWELVE MONTH TRAILING REDEMPTION RATE FOR LONG-TERM FUNDS

As at June 30 2010 2009

IGM Financial Inc.Investors Group 7.7% 7.5%Mackenzie 15.7% 17.3%Counsel 12.3% 13.6%


IGM

FIN

AN

CIA

L IN

C.



OTHER RISK FACTORS

Distribution RiskInvestors Group Consultant Network – Investors Groupderives all of its mutual fund sales through itsConsultant network. Investors Group Consultants haveregular direct contact with clients which can lead to astrong and personal client relationship based on theclient’s confidence in that individual Consultant. Themarket for financial advisors is extremely competitive.The loss of a significant number of key Consultantscould lead to the loss of client accounts which couldhave an adverse effect on Investors Group’s results ofoperations and business prospects. Investors Group isfocused on growing its distribution network ofConsultants as discussed in the Investors Group Reviewof the Business section of the MD&A in the 2009 IGMFinancial Inc. Annual Report.

Mackenzie – Mackenzie derives substantially all of itsmutual fund sales through independent financialadvisors. Mackenzie’s ability to market its products ishighly dependent on access to various distributionchannels. These intermediaries generally offer theirclients investment products in addition to, and incompetition with Mackenzie. The inability to have suchaccess could have a material adverse effect on Mackenzie’soperating results and business prospects. However,Mackenzie’s diverse portfolio of financial products andits long-term investment performance record, marketing,educational and service support has made Mackenzieone of Canada’s leading companies serving independentfinancial advisors. These factors are discussed further inthe Mackenzie Review of the Business section of theMD&A in the 2009 IGM Financial Inc. Annual Report.

The Regulatory EnvironmentIGM Financial is subject to complex and changinglegal, taxation and regulatory requirements, includingthe requirements of agencies of the federal, provincialand territorial governments in Canada which regulatethe Company and its activities. The Company and itssubsidiaries are also subject to the requirements of self-regulatory organizations to which they belong. Theprincipal regulators of the Company and its subsidiariesare the Canadian Securities Administrators, the MutualFund Dealers Association of Canada, the InvestmentIndustry Regulatory Organization of Canada and the

Office of the Superintendent of Financial Institutions.These and other regulatory bodies regularly adopt newlaws, rules, regulations and policies that apply to theCompany and its subsidiaries. Regulatory standardsaffecting the Company and the financial servicesindustry are increasing. The Company and itssubsidiaries are subject to regular regulatory reviews aspart of the normal ongoing process of oversight by thevarious regulators.

Failure to comply with laws, rules or regulationscould lead to regulatory sanctions and civil liability, andmay have an adverse reputational or financial effect onthe Company. The Company manages regulatory riskthrough its efforts to promote a strong culture ofcompliance. It monitors regulatory developments andtheir impact on the Company. It also continues todevelop and maintain compliance policies, processesand oversight, including specific communications oncompliance and legal matters, training, testing,monitoring and reporting. The Audit Committee of theCompany receives regular reporting on complianceinitiatives and issues.

Particular regulatory initiatives may have the effectof making the products of the Company’s subsidiariesappear to be less competitive than the products of otherfinancial service providers, to third party distributionchannels and to clients. Regulatory differences that mayimpact the competitiveness of the Company’s productsinclude regulatory costs, tax treatment, disclosurerequirements, transaction processes or other differencesthat may be as a result of differing regulation orapplication of regulation. While the Company and itssubsidiaries actively monitor such initiatives, and wherefeasible comment upon or discuss them with regulators,the ability of the Company and its subsidiaries tomitigate the imposition of differential regulatorytreatment of financial products or services is limited.

ContingenciesThe Company is subject to legal actions, including classactions, arising in the normal course of its business.Two proposed class actions which relate to allegedmarket timing trading activity in mutual funds of thecompanies have been initiated in Ontario and Quebec.Investors Group entered into settlement agreements in2004 with a number of its securities regulators inrespect of such market timing trading activity. Although


IGM

FINA

NC

IAL IN

C.



it is difficult to predict the outcome of such legalactions, based on current knowledge and consultationwith legal counsel, management does not expect theoutcome of any of these matters, individually or inaggregate, to have a material adverse effect on theCompany’s consolidated financial position.

Acquisition RiskThe Company undertakes thorough due diligence priorto completing an acquisition, but there is no assurancethat the Company will achieve the expected strategicobjectives or cost and revenue synergies subsequent toan acquisition. Subsequent changes in the economicenvironment and other unanticipated factors may affectthe Company’s ability to achieve expected earnings

growth or expense reductions. The success of anacquisition is dependent on retaining assets undermanagement, clients, and key employees of anacquired company.

Model RiskThe Company uses a variety of models to assist in: thevaluation of financial instruments; operational scenariotesting; management of cash flows; capital management;and, assessment of potential acquisitions. These modelsincorporate internal assumptions, observable marketinputs and available market prices. Effective controlsexist over the development, implementation andapplication of these models.

THE FINANCIAL SERVICES ENVIRONMENT

At June 30, 2010, mutual fund industry assets in Canadawere approximately $648.0 billion, a decrease of 0.8%relative to December 31, 2009. This $5.1 billion decreasein industry assets from December 31, 2009 reflected netcash inflow of $3.1 billion, an estimated $15.7 billion inmarket depreciation and $7.5 billion related primarilyto new reporting industry participants.

Following strong market growth since March 2009,global capital markets are assessing short term economicindicators for confirmation of growth. The uncertaintyas to the breadth, strength and durability of futuregrowth could lead to further capital market volatility.

In this context, the importance of a strong relationshipwith an advisor to keep focused on long-term financialgoals is paramount. A primary theme in the Company’sbusiness model is to support financial advisors as they workwith clients to plan for and achieve their financial goals.

Investors Group continues to respond to the complexfinancial needs of its clients by delivering a diverse rangeof products and services in the context of personalizedfinancial advice and its Consultants work with clients tohelp them understand the impact of financial marketvolatility on their long-term financial planning.

Mackenzie is maintaining its focus on deliveringconsistent long-term investment performance staying

true to the multiple styles deployed in the investmentprocess, while continuing to emphasize productinnovation and communication with advisors andinvestors through this period of market volatility.

As Canadians deal with the current economicconditions, they will increasingly be focused on theirshort and long-term financial planning needs. IGMFinancial continues to focus on its commitment toprovide quality investment advice and financial products,service innovations, effective management of the Companyand long-term value for its clients and shareholders.

In addition to current market conditions, thefinancial services industry continues to be influenced by:• Shifting demographics as the number of Canadians

in their prime savings years continue to increase. • Changes in investor attitudes and strong preferences

to deal through an advisor.• Changes in the regulatory environment.• An evolving competitive landscape.• Advancing and changing technology.

Deregulation, competition and technology havefostered a trend towards financial service providersoffering a comprehensive range of products and servicesin-house. Traditional distinctions between bank branches,full service brokerages, financial planning firms andinsurance agent forces are obscured as many of thesefinancial service providers strive to offer comprehensive

Outlook


IGM

FIN

AN

CIA

L IN

C.



financial advice implemented through access to a broadproduct shelf.

Investment funds, which include mutual funds,remain the most popular financial asset class reliedupon by Canadians for their retirement savings, andthey represent over one-third of Canadian long-termdiscretionary financial assets. Management believes thatinvestment funds are likely to remain the preferredsavings vehicle of Canadians. Investment funds provideinvestors with the benefits of diversification, professionalmanagement, flexibility and convenience, and areavailable in a broad range of mandates and structures tomeet most investor requirements and preferences.

THE COMPETITIVE LANDSCAPE

IGM Financial and its subsidiaries operate in a highlycompetitive environment. Investors Group andInvestment Planning Counsel compete directly withother retail financial service providers, including otherfinancial planning firms, as well as full service brokerages,banks and insurance companies. Investors Group,Mackenzie and Counsel compete directly with otherinvestment managers for assets under management, andalso compete with other asset classes, including stocks,bonds and other passive investment vehicles, for a shareof the investment assets of Canadians.

Canadian banks remain a dominant force inCanadian retail financial services. The banks distributefinancial products and services through their traditionalbank branches, as well as through their full service anddiscount brokerage subsidiaries. In recent years, bankbranches have increased their emphasis on both financialplanning and mutual funds. In addition, each of the bigsix banks has one or more mutual fund managementsubsidiaries. Collectively, mutual fund assets of the bigsix bank-owned mutual fund managers and affiliatedfirms represented 39% of total industry long-termmutual fund assets at June 30, 2010.

Mutual fund dealers and other financial planningfirms represent a significant distribution channel formutual funds in Canada. The last several years havebeen characterized by significant consolidation in thissector of the industry, with many of the larger firms

being purchased by mutual fund managers and insurers.Management anticipates continuing consolidation inthis segment of the industry as smaller participants areacquired by larger organizations.

As a result of consolidation activity in the last severalyears, the Canadian mutual fund management industryis characterized by large, often vertically-integrated,firms. The industry continues to be very concentrated,with the ten largest firms and their subsidiariesrepresenting 77.5% of industry long-term mutual fundassets and 77.8% of total mutual fund assets undermanagement at June 30, 2010.

Strong evidence is emerging that Canadians valueadvice in their financial planning and investmentactivities. Multiple sources of research showsignificantly better financial outcomes for Canadianswho use financial advisors compared to those who donot. We believe the provision of comprehensive financialplanning to Canadians is and will continue to be acompetitive advantage.

Management believes scale, access to distribution,support for financial advice and a broad product shelfare key competitive success factors in the financialservices industry.

MEETING COMPETITIVE CHALLENGES

Management believes that IGM Financial is well-positioned to meet competitive challenges and capitalizeon future opportunities. The Company enjoys severalcompetitive strengths, including: • Broad and diversified distribution with an emphasis

on financial advisors.• Broad product capabilities, leading brands and

quality sub-advisory relationships.• Enduring client relationships and the long-standing

heritages and cultures of its subsidiaries.• Significant economies of scale. • Being part of the Power Financial group of

companies, which includes Great-West Life,London Life and Canada Life.These strengths are discussed in detail in the

Outlook section of the MD&A in the 2009 IGMFinancial Inc. Annual Report.


IGM

FINA

NC

IAL IN

C.



SUMMARY OF CRITICAL ACCOUNTING ESTIMATES

There were no changes to the Company’s criticalaccounting estimates from those reported atDecember 31, 2009, except as noted below:• Goodwill and intangible assets – The Company tests

the fair value of goodwill and indefinite life intangibleassets for impairment at least once a year and morefrequently if an event or circumstance indicates theasset may be impaired. Goodwill impairment testingis a two step process. Goodwill is first allocated toreporting units and impairment is assessed bycomparing the value of a reporting unit to its carryingamount. If the fair value of the reporting unit exceedsits carrying value, no further testing is performed. Ifthe fair value of the reporting unit is less than itscarrying value, a second test is performed to comparethe fair value of goodwill to its carrying value todetermine the amount of impairment loss, if any.Indefinite life intangible assets are tested forimpairment by comparing their fair value to theircarrying amounts. Definite life intangible assets aretested for recoverability whenever events or changesin circumstances indicate that the carrying amountsmay not be recoverable.

These tests involve the use of estimates andassumptions appropriate in the circumstances. Inassessing fair value, valuation models are used thatinclude discounted cash flows, comparable acquisitionsand industry trading multiples. The models useassumptions that include levels of growth in assetsunder management from net sales and market,pricing and margin changes, synergies achieved onacquisition, discount rates, and observable data forcomparable transactions.

The Company completed its annual impairmenttests of goodwill and indefinite life intangible assetsbased on March 31, 2010 financial information anddetermined that there was no impairment in thevalue of those assets.

CHANGES IN ACCOUNTING POLICIES

There were no changes in accounting policies adoptedby the Company during 2010.

FUTURE ACCOUNTING CHANGES

International Financial Reporting Standards (IFRS) The Canadian Accounting Standards Board hasannounced that Canadian GAAP will be replaced byIFRS, as published by the International AccountingStandards Board (IASB). Publicly accountableenterprises will be required to adopt IFRS for fiscalperiods beginning on or after January 1, 2011. TheCompany will commence reporting under IFRS in itsinitial interim Consolidated Financial Statements,including comparative information, for the quarterended March 31, 2011.

The Company has developed an IFRS changeoverplan which addresses key elements of the conversion toIFRS and includes a formal project governancestructure. In addition to the project teams assigned toanalyze specific accounting topics, there are oversightcommittees – a technical review committee comprisedof financial managers from each of the Company’soperating subsidiaries, an executive steering committee,and the Company’s Audit Committee. The Companyhas developed appropriate levels of IFRS financialreporting expertise throughout the Company and itssubsidiaries, and has engaged an external consultant tosupport this effort. The changeover plan consists ofthree primary phases:

Scoping and diagnostic (Phase 1)• This phase consists of: i) establishing the project

structure, ii) providing initial training and education,iii) developing a financial reporting solution forparallel accounting under IFRS and Canadian GAAPin 2010, and iv) identifying the key differencesbetween Canadian GAAP and IFRS. This phasebegan in Q1 2008 and is complete;

Impact analysis and design (Phase 2)• This phase consists of: i) quantifying the differences

between Canadian GAAP and IFRS and selectinginitial policy choices, ii) making preliminary electionsunder IFRS 1, First Time Adoption of InternationalFinancial Reporting Standards (IFRS 1), iii) testingand implementing parallel accounting for CanadianGAAP and IFRS, iv) continuing to analyze new andrevised standards as they are issued, v) performingrequired impairment testing of goodwill andintangible assets as at January 1, 2010, vi) providing

Critical Accounting Estimates and Policies


IGM

FIN

AN

CIA

L IN

C.



ongoing training and education on specific IFRSissues, vii) designing a communications plan, andviii) drafting templates for IFRS financial statementsand note disclosure. This phase began in December2009 and is expected to be substantially complete inQ3 2010; and,

Implementation (Phase 3)• This phase will consist of: i) finalizing the Company’s

decisions under IFRS, ii) making final selections ofthe conversion elections available under IFRS 1, iii)completing 2011 financial statement disclosures, andiv) ensuring all elements of the communication planare completed. The implementation phase is expectedto be substantially completed once the Company hasissued its Q1 2011 financial statements. The Company has not finalized quantifying the

effects of the differences between IFRS and CanadianGAAP. The Company is in the process of making itsIFRS 1 elections; final decisions will be made as part ofits phase 3 deliberations. The Company continues tomonitor the development and interpretation of standardsas well as industry practices.

The major differences identified between IFRS andCanadian GAAP were discussed in the MD&A in the2009 IGM Financial Inc. Annual Report. No additionaldifferences were identified during the second quarter.

In the second quarter, the Company continued withPhase 2 of its IFRS project – the impact analysis anddesign. In the second quarter the following elementswere completed: • Designed incremental internal controls required to

process the IFRS adjustments during 2010;• Conducted additional educational and training

sessions focusing on changes to the general ledgersystem, including changes in internal controls, withrespect to the processing of IFRS adjustments;

• Determined implementation plans for other systemsaffected by the IFRS changes identified; and

• Goodwill and intangible asset impairment testing asof January 1, 2010.The Company is focusing its resources on the

following elements:• Quantification of opening retained earnings

adjustments where accounting differences havebeen identified;

• A communication plan including internal andexternal communication strategies;

• Templates for IFRS financial statements and notedisclosures; and

• A review of IFRS 1 which is the standard thataddresses the first-time conversion to IFRS andincludes a number of optional exemptions to thegeneral requirement for full retrospective applicationof IFRS. The Company expects it will utilize thefollowing elections on conversion to IFRS: – Business Combinations: The Company expects to

elect not to restate past business combinationsprior to January 1, 2010, as allowed by IFRS 1;

– Property Plant and Equipment: IFRS 1 allows anissuer to elect to restate property, plant andequipment at fair value on conversion to IFRS.The exemption can be applied on an asset by assetbasis. The Company expects to use this electionfor certain assets; and,

– Employee Benefits: IFRS 1 permits an issuer toreflect all cumulative actuarial gains and lossesthrough opening retained earnings, rather thanrestating these amounts under IFRS. TheCompany continues to examine whether to adoptthis exemption with the final decision expected inthe second half of the year.

The IASB is currently undertaking several projectswhich will result in changes to existing IFRS standardsthat may affect the Company:

IFRS Standard Expected date of issuance

Leases Q3 2010 – Exposure DraftConsolidations –

Investment Companies Q4 2010 – Exposure DraftConsolidations Q4 2010 – Final StandardIncome Taxes Q4 2010 – Exposure DraftFinancial Statement

Presentation Q1 2011 – Exposure DraftRevenue Recognition Q1 2011 – Final StandardFair Value Measurement Q1 2011 – Final StandardEmployee Benefits Q1 2011 – Final StandardHedge Accounting Q2 2011 – Final StandardImpairment Q2 2011 – Final StandardDerecognition 2012

Source: IASB website at iasb.org


IGM

FINA

NC

IAL IN

C.



As discussed in the MD&A in the 2009 IGMFinancial Inc. Annual Report, the Company had beenpreparing to implement either the current or revisedderecognition standard. As the revised standard is nownot expected to be issued until after the conversion toIFRS, the Company will be adopting the currentstandard and will assess the effect of transitioning to therevised standard when it is issued. The IASB currentlyhas an exemption that allows companies converting toIFRS to continue to derecognize assets that wouldotherwise not meet the criteria for derecognition underIFRS. During the second quarter of 2010, the IASBagreed to replace the fixed date of January 1, 2004 ofthis exemption with the ‘Date of Transition to IFRS’,which is January 1, 2010 for the Company. Thischange, if made, could have an effect on the Company’saccounting for its financial assets.

The Company has developed and implementedchanges to its financial reporting systems and processesto prepare the Company to effectively transition toIFRS at January 1, 2011. These include the design,testing, and implementation of general ledger changesand related controls to enable the Company to parallelaccount and report under both Canadian GAAP andIFRS during 2010. As each IFRS standard is analyzedand adopted, additional controls are developed andtested as appropriate. Once the final determination ofall accounting policies is complete, changes to ensurethe integrity of internal controls over financialreporting and disclosure controls and procedures will befinalized. These changes may include additionalcontrols or procedures related to additional IFRSreporting requirements, changes in accountingprocesses, and first time reporting of IFRS financialresults and related note disclosures. Throughout 2010,the Company will be testing its ability to prepare IFRSfinancial results and will compare them to the CanadianGAAP results, in order to test and validate thedifferences between IFRS and Canadian GAAP that arequantified during phase 2 of the project.

The effect on the Company’s informationtechnology, data systems, and financial reportingprocesses are being reviewed and updated to addressIFRS requirements. This assessment considered systemsbeyond the Company’s primary financial reportingsystem, the general ledger system. The assessment isbeing continually reviewed as IFRS accounting andreporting decisions are made.

Training and education plans will be modified asnecessary based on the introduction of new IFRSstandards, the Company’s IFRS accounting policies, andthe IFRS 1 elections made by the Company. Theseplans consider the training and education requirementsof various internal constituents, which include: the staffof the Company and its subsidiaries, the Disclosure andAudit Committees, the Company’s Board of Directors,and external users of the Company’s financial reporting,including equity and debt analysts, credit ratingagencies, shareholders, debtholders, and prospectiveinvestors.

The Company’s overall IFRS changeover planincludes a component designed to assess the adoption ofIFRS by the mutual funds sponsored and managed bythe Company’s operating subsidiaries. The CICA hasissued an exposure draft which would allow a one yeardeferral in adoption of IFRS for investment companies.As a result, the first interim reporting period for themutual funds may be September 30, 2012. TheCompany is currently assessing the impact of thisexposure draft on the mutual funds’ plans for adoptingIFRS. Accordingly, the mutual funds will adopt IFRSfor either fiscal period beginning April 1, 2011 or 2012.Based on the current evaluation of the differencesbetween Canadian GAAP and IFRS, the impact to themutual funds is expected to be limited to additionalfinancial statement note disclosure and presentationchanges. No significant effect is expected on the netasset values used to determine the subscription andredemption price of the mutual funds.


IGM

FIN

AN

CIA

L IN

C.



TRANSACTIONS WITH RELATED PARTIES

There were no changes to the types of related partytransactions from those reported at December 31, 2009.For further information on transactions involvingrelated parties, see Notes 5 and 22 of the ConsolidatedFinancial Statements in the 2009 IGM Financial Inc.Annual Report.

OUTSTANDING SHARE DATA

Outstanding common shares of IGM Financial as atJune 30, 2010 totalled 261,697,049. As at August 4,2010, outstanding common shares totalled 261,698,349.

SEDAR

Additional information relating to IGM Financial,including the Company’s most recent financialstatements and Annual Information Form, is available atwww.sedar.com.

Other Information

During the second quarter of 2010, there have been nochanges in the Company’s internal control overfinancial reporting that have materially affected, or arereasonably likely to materially affect, the Company’sinternal control over financial reporting.

Internal Controls Over Financial Reporting


IGM

FINA

NC

IAL IN

C.


i gm f inanc ial inc . s econd quarter report 2010 / inter im consol idated f inanc ial statements 43

Consolidated Statements of Earnings

Interim Consolidated Financial Statements

(unaudited) three months ended june 30 six months ended june 30(in thousands of dollars, except shares and per share amounts) 2010 2009 2010 2009

RevenuesManagement fees $ 455,458 $ 399,340 $ 905,192 $ 764,759 Administration fees 89,168 86,902 177,682 169,224 Distribution fees 71,946 62,337 144,795 124,673 Net investment income and other 26,646 43,033 64,987 95,818

643,218 591,612 1,292,656 1,154,474

ExpensesCommission 215,310 197,309 429,839 389,685 Non-commission 161,241 158,252 322,088 316,767 Interest 27,571 32,431 54,873 59,132

404,122 387,992 806,800 765,584

Earnings before income taxes 239,096 203,620 485,856 388,890 Income taxes 57,764 59,116 122,345 110,859

Net earnings 181,332 144,504 363,511 278,031 Perpetual preferred share dividends 2,213 – 5,680 –

Net earnings available to common shareholders $ 179,119 $ 144,504 $ 357,831 $ 278,031

Average number of common shares (in thousands) (Note 9)

– Basic 262,339 262,925 262,485 262,673 – Diluted 263,555 264,102 263,774 263,600

Earnings per share (in dollars) (Note 9)

– Basic $ 0.68 $ 0.55 $ 1.36 $ 1.06 – Diluted $ 0.68 $ 0.55 $ 1.36 $ 1.05

(See accompanying notes to interim consolidated financial statements.)


IGM

FIN

AN

CIA

L IN

C.


44 i gm f inanc ial inc . s econd quarter report 2010 / inter im consol idated f inanc ial statements

Consolidated Balance Sheets

(unaudited) JUNE 30 december 31(in thousands of dollars) 2010 2009

AssetsCash and cash equivalents $ 1,114,330 $ 945,081Securities (Note 2) 974,393 1,246,259Loans 825,575 671,556Investment in affiliate 585,671 598,221Deferred selling commissions 834,603 850,082Other assets 525,087 592,908Intangible assets 1,128,751 1,128,280Goodwill 2,620,076 2,613,532

$ 8,608,486 $ 8,645,919

LiabilitiesDeposits and certificates $ 862,637 $ 907,343Repurchase agreements (Note 2) 624,232 629,817Other liabilities 773,470 780,329Future income taxes 326,086 328,617Long-term debt 1,575,000 1,575,000

4,161,425 4,221,106

Shareholders’ EquityShare capital

Perpetual preferred shares 150,000 150,000Common shares 1,568,588 1,562,925

Contributed surplus 31,410 32,702Retained earnings 2,783,129 2,737,785Accumulated other comprehensive loss (86,066) (58,599)

4,447,061 4,424,813

$ 8,608,486 $ 8,645,919



IGM

FINA

NC

IAL IN

C.



Consolidated Statements of Changes in Shareholders’ Equity

(unaudited) three months ended june 30 six months ended june 30(in thousands of dollars) 2010 2009 2010 2009

Share capital – Perpetual preferred shares (Note 4)

Balance, end of period $ 150,000 $ – $ 150,000 $ –

Share capital – Common shares (Note 4)

Balance, beginning of period 1,570,645 1,514,850 1,562,925 1,511,110Issued on acquisition of Investment Planning Counsel

non-controlling interest – 40,734 – 40,734Issued under stock option plan 3,035 10,153 13,984 14,238Purchased for cancellation (5,092) – (8,321) (345)

Balance, end of period 1,568,588 1,565,737 1,568,588 1,565,737

Contributed surplusBalance, beginning of period 30,500 30,817 32,702 29,115Stock options

Current period expense 1,154 1,648 383 3,442Exercised (244) (220) (1,675) (312)

Balance, end of period 31,410 32,245 31,410 32,245

Retained earningsBalance, beginning of period 2,763,221 2,778,973 2,737,785 2,781,755Net earnings 181,332 144,504 363,511 278,031Perpetual preferred share dividends (2,213) – (5,680) –Common share dividends (134,320) (135,319) (268,811) (269,838)Common share cancellation excess and other (Note 4) (24,891) 121 (43,676) (1,669)

Balance, end of period 2,783,129 2,788,279 2,783,129 2,788,279

Accumulated other comprehensive income (loss) on:Available for sale securities

Balance, beginning of period 3,224 (134,447) 1,321 (112,031)Net unrealized gains (losses), net of tax of $1,050,

$(7,361), $(303) and $(4,653) (4,923) 43,283 2,530 23,476Reclassification adjustment for (gains) losses included

in net earnings, net of tax of $182, $435, $1,154 and $845 (697) (1,608) (6,247) (4,217)

Balance, end of period (2,396) (92,772) (2,396) (92,772)

Investment in affiliate and otherBalance, beginning of period (67,248) (32,116) (59,920) (61,028)Other comprehensive income (loss),

net of tax of $(31), $nil, $(17) and $nil (16,422) 1,352 (23,750) 30,264

Balance, end of period (83,670) (30,764) (83,670) (30,764)

Total accumulated other comprehensive income (loss), end of period (86,066) (123,536) (86,066) (123,536)

Total Shareholders’ Equity $ 4,447,061 $ 4,262,725 $ 4,447,061 $ 4,262,725



IGM

FIN

AN

CIA

L IN

C.


46 i gm f inanc ial inc . s econd quarter report 2010 / inter im consol idated f inanc ial statements

Consolidated Statements of Comprehensive Income


Net earnings $ 181,332 $ 144,504 $ 363,511 $ 278,031

Other comprehensive income (loss), net of tax on:Available for sale securities (5,620) 41,675 (3,717) 19,259 Investment in affiliate and other (16,422) 1,352 (23,750) 30,264

Other comprehensive income (loss) (22,042) 43,027 (27,467) 49,523

Comprehensive income $ 159,290 $ 187,531 $ 336,044 $ 327,554



IGM

FINA

NC

IAL IN

C.



Consolidated Statements of Cash Flows


Operating activitiesNet earnings $ 181,332 $ 144,504 $ 363,511 $ 278,031 Adjustments to determine net cash from operating activities

Future income taxes (11,720) (13,084) (2,170) (10,134)Commission amortization 76,488 75,189 151,745 149,465 Amortization of capital and intangible assets 8,252 8,684 16,360 16,827 Changes in operating assets and liabilities and other 7,297 38,238 (22,834) 18,391

261,649 253,531 506,612 452,580 Commissions paid (55,324) (47,464) (136,266) (108,953)

206,325 206,067 370,346 343,627

Financing activitiesNet (decrease) increase in deposits and certificates (38,914) (48,354) (44,706) 37,910 Repayment of bankers’ acceptances – (286,615) – (286,615)Net (decrease) increase in obligations related to

assets sold under repurchase agreements (5,409) 25,275 (5,585) 617,728 Issue of debentures – 375,000 – 375,000 Issue of common shares 2,792 9,933 16,574 13,926 Common shares purchased for cancellation (29,904) – (51,838) (1,592)Perpetual preferred share dividends paid (3,467) – (3,467) – Common share dividends paid (134,492) (134,519) (269,101) (268,981)

(209,394) (59,280) (358,123) 487,376

Investing activitiesPurchase of securities (66,723) (379,106) (141,845) (1,040,830)Proceeds from the sale of securities 159,746 340,416 464,368 423,192 Net increase in loans (496,906) (459,249) (703,654) (777,314)Proceeds from securitizations (Note 3) 349,029 398,754 551,317 617,167 Net additions to capital assets (3,161) (1,607) (4,916) (3,499)Net additions to intangible assets (1,694) (2,795) (8,244) (3,463)Acquisition of non-controlling interest – (1,048) – (1,048)

(59,709) (104,635) 157,026 (785,795)

(Decrease) increase in cash and cash equivalents (62,778) 42,152 169,249 45,208 Cash and cash equivalents, beginning of period 1,177,108 1,235,227 945,081 1,232,171

Cash and cash equivalents, end of period $ 1,114,330 $ 1,277,379 $ 1,114,330 $ 1,277,379

Cash $ 79,323 $ 121,929 $ 79,323 $ 121,929 Cash equivalents 1,035,007 1,155,450 1,035,007 1,155,450

$ 1,114,330 $ 1,277,379 $ 1,114,330 $ 1,277,379

Supplemental disclosure of cash flow informationAmount of interest paid during the period $ 46,328 $ 38,468 $ 59,399 $ 59,278 Amount of income taxes paid during the period $ 67,106 $ 80,004 $ 143,765 $ 134,072



IGM

FIN

AN

CIA

L IN

C.


48 i gm f inanc ial inc . s econd quarter report 2010 / notes to the inter im consol idated f inanc ial statements

Notes to the Interim Consolidated Financial Statementsjune 30, 2010 (unaudited) (In thousands of dollars, except shares and per share amounts)

1. SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited Consolidated Financial Statements have been prepared in accordance with Canadian generallyaccepted accounting principles (GAAP), using the same accounting policies as set out in Note 1 to the ConsolidatedFinancial Statements for the year ended December 31, 2009. These interim unaudited Consolidated FinancialStatements should be read in conjunction with the Consolidated Financial Statements and Notes in the Company’sAnnual Report dated December 31, 2009.

Future accounting changesThe Canadian Accounting Standards Board has announced that Canadian GAAP will be replaced by InternationalFinancial Reporting Standards (IFRS), as published by the International Accounting Standards Board. Publicly accountableenterprises will be required to adopt IFRS on or by January 1, 2011. The Company will issue its initial ConsolidatedFinancial Statements under IFRS, including comparative information, for the quarter ended March 31, 2011.

Comparative figuresCertain comparative figures have been reclassified to conform with the current period’s financial statementpresentation.

2. SECURITIES

JUNE 30, 2010 december 31, 2009

fair faircost value cost value

Available for sale:Common shares $ 20,755 $ 18,139 $ 236,383 $ 237,085Proprietary investment funds 34,016 32,763 41,259 41,341Fixed income securities 260,453 261,562 314,260 315,387

315,224 312,464 591,902 593,813

Held for trading:Canada Mortgage Bonds 647,318 634,255 647,318 624,703Fixed income securities 31,374 27,674 31,443 27,743

678,692 661,929 678,761 652,446

$ 993,916 $ 974,393 $ 1,270,663 $ 1,246,259

Common shares (Available for sale)Net unrealized losses on common shares were $2.6 million at June 30, 2010 compared with net unrealized gains of$0.7 million at December 31, 2009. Unrealized losses as at June 30, 2010 on common shares are reported inAccumulated other comprehensive income.

Fixed income securities (Available for sale)The Company holds a diversified portfolio of fixed income securities totalling $261.6 million at June 30, 2010 whichis comprised of bankers’ acceptances of $68.1 million, Canadian chartered bank senior deposit notes and floating ratenotes of $83.2 million and $35.0 million respectively, government guaranteed short-term investments of $10.0 million,and corporate bonds and other of $65.3 million.


IGM

FINA

NC

IAL IN

C.


i gm f inanc ial inc . s econd quarter report 2010 / notes to the inter im consol idated f inanc ial statements 49

Canada Mortgage Bonds (Held for trading)As part of the Company’s interest rate risk management activities relating to its mortgage banking operations, CanadaMortgage Bonds were purchased and subsequently sold under repurchase agreements, which represent short-termfunding transactions where the Company sells securities that it owns and commits to repurchase these securities at aspecified price on a specified date in the future. These securities have a fair value of $634.3 million. The obligation torepurchase the securities is recorded at amortized cost and has a carrying value of $624.2 million. The interest expenserelated to these obligations is recorded on an accrual basis in Net investment income and other in the ConsolidatedStatements of Earnings.

Fixed income securities (Held for trading)Fixed income securities of $27.7 million at June 30, 2010 are comprised of non-bank-sponsored asset-backedcommercial paper (ABCP). During 2010, the Company’s investment in ABCP was reduced by $0.1 million,representing principal and interest payments received from the ABCP conduit trusts.

The Company’s valuation of the ABCP was based on its assessment of the prevailing conditions at June 30, 2010.The estimated fair value reflects the allocation of the floating rate notes the Company received which are expected tomature in January 2017. The Company estimated the fair value of the senior and subordinated notes by discountingthe expected cash flows at yields comparable to prevailing market yields and credit spreads available for securitieswith similar characteristics to the restructured notes and other market inputs reflecting the Company’s best availableinformation. The fair value of the Ineligible Asset Tracking long-term floating rate notes was estimated usingobservable market inputs from independent pricing sources or by discounted expected cash flows reflecting theCompany’s best available information, including reference to prevailing market yields on debt instruments in theCanadian market. As at June 30, 2010, an increase in the estimated discount rates of 100 basis points would reducenet earnings by $1.7 million.

3. SECURITIZATIONS

The Company securitizes residential mortgages through Canada Mortgage and Housing Corporation (CMHC) orCanadian bank sponsored securitization trusts. The Company issues National Housing Act Mortgage BackedSecurities (NHA MBS) which are sold to a trust that issues securities to investors through the CMHC-sponsoredCanada Mortgage Bond Program (CMB Program). Pre-tax gains (losses) on the sale of mortgages are reported inNet investment income and other in the Consolidated Statements of Earnings.

Securitization activities for the three and six month periods ended June 30, 2010 and 2009 were as follows:

three months ended june 30 six months ended june 302010 2009 2010 2009

Residential mortgages securitized $ 351,323 $ 401,007 $ 555,049 $ 620,635Net cash proceeds 349,029 398,754 551,317 617,167Fair value of retained interests 11,496 16,483 20,467 30,659Pre-tax gain on sales 6,023 17,154 11,585 28,580

2. SECURITIES (continued)


IGM

FIN

AN

CIA

L IN

C.



4. SHARE CAPITAL

Issued and outstandingJUNE 30, 2010 june 30, 2009

stated statedshares value shares value

Preferred shares – classified as liabilities:First preferred shares, Series A – $ – 14,400,000 $ 360,000

Perpetual preferred shares – classified as equity:First preferred shares, Series B 6,000,000 $ 150,000 – $ –

Common shares:Balance, beginning of period 262,633,255 $ 1,562,925 262,364,622 $ 1,511,110Issued on acquisition of Investment

Planning Counsel non-controlling interest – – 1,095,712 40,734Issued under Stock Option Plan 453,794 13,984 650,904 14,238Purchased for cancellation (1,390,000) (8,321) (60,000) (345)

Balance, end of period 261,697,049 $ 1,568,588 264,051,238 $ 1,565,737

Normal course issuer bidIn the second quarter of 2010, 850,000 shares were purchased at a cost of $29.9 million and in the six months endedJune 30, 2010, 1,390,000 shares were purchased at a cost of $51.8 million. In the second quarter of 2009, no shareswere purchased and during the six months ended June 30, 2009, 60,000 shares were purchased at a cost of $1.6 million.The premium paid to purchase the shares in excess of the stated value was charged to Retained earnings.

The Company commenced a normal course issuer bid, effective for one year, on April 12, 2010. Pursuant to thisbid, the Company may purchase up to 13.1 million or 5% of its common shares outstanding as at March 31, 2010.On March 23, 2009, the Company had commenced a normal course issuer bid, effective for one year, authorizing it topurchase up to 13.1 million or 5% of its common shares outstanding as at March 13, 2009.

5. CAPITAL MANAGEMENT

The capital management policies, procedures and activities of the Company are discussed in the Company’sManagement’s Discussion and Analysis (MD&A), contained in the Second Quarter 2010 Report to Shareholders andhave not changed significantly since December 31, 2009.

6. STOCK-BASED COMPENSATION

JUNE 30 december 312010 2009

Common share options– Outstanding 9,786,246 9,415,005– Exercisable 4,823,980 4,541,430

In the second quarter of 2010, the Company granted 335,000 options to employees (2009 – 263,288). In the six monthsended June 30, 2010, the Company granted 1,182,125 options to employees (2009 – 1,569,503). A portion of theoptions granted to employees are subject to performance targets. The weighted-average fair value of options grantedduring the six months ended June 30, 2010 has been estimated at $5.53 per option (2009 – $2.21) using the Black-Scholes option pricing model. The assumptions used to determine the fair value of the options on the grant dateinclude: (i) risk-free interest rate of 3.11% (2009 – 2.23%), (ii) expected option life of 6.0 years (2009 – 5.7 years),(iii) expected volatility of 22.00% (2009 – 20.84%) and (iv) expected dividend yield of 4.87% (2009 – 7.27%).


IGM

FINA

NC

IAL IN

C.



Options vest over a period of up to 7.5 years from the grant date and are exercisable no later than 10 years afterthe grant date. A portion of the outstanding options can only be exercised once certain performance targets are met.

7. RISK MANAGEMENT

The risk management policies and procedures of the Company are discussed in the Company’s MD&A contained inthe Second Quarter 2010 Report to Shareholders and have not changed significantly since December 31, 2009.

8. EMPLOYEE FUTURE BENEFITS

The Company recorded pension and other post-retirement benefits expense as follows:


Pension expense $ 877 $ 1,227 $ 1,757 $ 2,444Other post-retirement benefits expense 105 992 209 1,984

Total $ 982 $ 2,219 $ 1,966 $ 4,428

9. EARNINGS PER COMMON SHARE


EarningsNet earnings available to common shareholders $ 179,119 $ 144,504 $ 357,831 $ 278,031

Number of common shares (in thousands)

Average number of common shares outstanding 262,339 262,925 262,485 262,673Add: Potential exercise of outstanding stock options 1,216 1,177 1,289 927

Average number of common shares outstanding– Diluted basis 263,555 264,102 263,774 263,600

Earnings per common share (in dollars)

– Basic $ 0.68 $ 0.55 $ 1.36 $ 1.06– Diluted $ 0.68 $ 0.55 $ 1.36 $ 1.05

10. SEGMENTED INFORMATION

IGM Financial’s reportable segments are:• Investors Group• Mackenzie• Corporate and Other

These segments reflect the current organizational structure and internal financial reporting. Management measuresand evaluates the performance of these segments based on earnings before interest and taxes.

Effective January 1, 2010, the items noted below were reclassified to reflect changes in the Company’s internalfinancial reporting:• The Company’s proportionate share of earnings of Great-West Lifeco Inc. (Lifeco) and realized gains and losses

on the sale of equity securities were reclassified to the Corporate and Other segment and are recorded in Netinvestment income and other. Previously these amounts were recorded in Net investment income and other in theInvestors Group segment.

6. STOCK-BASED COMPENSATION (continued)


IGM

FIN

AN

CIA

L IN

C.



• Interest expense on the $225.0 million of long-term debt incurred to finance the Company’s investment in Lifecois no longer allocated to a specific segment and is reflected in interest expense. As a result, interest expense notallocated to segments includes interest on all of the Company’s outstanding long-term debt. Previously the amountwas recorded in Net investment income and other in the Investors Group segment.

Prior periods have been restated to reflect this reclassification.2010

investors corporateThree months ended June 30 group mackenzie and other total

RevenuesManagement fees $ 275,719 $ 170,682 $ 9,057 $ 455,458Administration fees 54,615 33,094 1,459 89,168Distribution fees 44,895 6,151 20,900 71,946Net investment income and other (1,016) 3,048 24,614 26,646

374,213 212,975 56,030 643,218

ExpensesCommission 120,137 74,650 20,523 215,310Non-commission 85,271 67,208 8,762 161,241

205,408 141,858 29,285 376,551

Earnings before undernoted $ 168,805 $ 71,117 $ 26,745 266,667

Interest expense 27,571

Earnings before income taxes 239,096Income taxes 57,764

Net earnings 181,332Perpetual preferred share dividends 2,213

Net earnings available to common shareholders $ 179,119

10. SEGMENTED INFORMATION (continued)


IGM

FINA

NC

IAL IN

C.




2009

investors corporateThree months ended June 30 group mackenzie and other total

RevenuesManagement fees $ 237,755 $ 153,545 $ 8,040 $ 399,340Administration fees 51,213 35,194 495 86,902Distribution fees 36,604 6,493 19,240 62,337Net investment income and other 18,740 3,522 20,771 43,033

344,312 198,754 48,546 591,612


191,312 137,625 26,624 355,561




Net earnings $ 144,504


IGM

FIN

AN

CIA

L IN

C.




2010

investors corporateSix months ended June 30 group mackenzie and other total

RevenuesManagement fees $ 547,402 $ 340,010 $ 17,780 $ 905,192Administration fees 109,084 65,771 2,827 177,682Distribution fees 86,691 12,682 45,422 144,795Net investment income and other 6,889 6,438 51,660 64,987

750,066 424,901 117,689 1,292,656


405,275 284,799 61,853 751,927




Net earnings 363,511Perpetual preferred share dividends 5,680

Net earnings available to common shareholders $ 357,831

Identifiable assets $ 2,013,437 $ 2,401,097 $ 1,573,876 $ 5,988,410Goodwill 1,347,781 1,172,750 99,545 2,620,076

Total assets $ 3,361,218 $ 3,573,847 $ 1,673,421 $ 8,608,486


IGM

FINA

NC

IAL IN

C.




2009

investors corporateSix months ended June 30 group mackenzie and other total

RevenuesManagement fees $ 451,635 $ 297,334 $ 15,790 $ 764,759Administration fees 99,172 69,015 1,037 169,224Distribution fees 71,743 13,086 39,844 124,673Net investment income and other 37,109 6,786 51,923 95,818

659,659 386,221 108,594 1,154,474


377,415 273,828 55,209 706,452




Net earnings $ 278,031

Identifiable assets $ 1,942,052 $ 2,621,526 $ 1,895,592 $ 6,459,170Goodwill 1,347,781 1,166,842 108,145 2,622,768

Total assets $ 3,289,833 $ 3,788,368 $ 2,003,737 $ 9,081,938


PARGESA HOLDING SA

PA RT D

JUNE 30, 2010

PAR

GESA

HO

LDIN

G SA

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 D 1

PFC_QUAT2_ENG04_PGA_2010-08-02_v01.indd E1PFC_QUAT2_ENG04_PGA_2010-08-02_v01.indd E1 8/6/10 8:15:12 AM8/6/10 8:15:12 AM

PAR

GES

A H

OLD

ING

SA

PARGESA HOLDING SA ECONOMIC PRESENTATION OF PARGESA RESULTS

As a supplement to the accounts drawn up under the format recommended by the IFRS standards, Pargesa continues to publish an economic presentation of its results, in order to provide continuous information over the long term about the contribution of each of its major shareholdings to its results. Because the IFRS standards impose different accounting treatments depending on the group’s percentage holding in each of its investments (full integration of Imerys, equity accounting of Lafarge, and classification of Total, GDF Suez, Suez Environnement, Pernod Ricard and Iberdrola as financial instruments), this continuous view would be interrupted without this supplementary information. The economic presentation shows, in terms of group share, the operating contribution of the main shareholdings to the consolidated income of Pargesa together with the income from the operations of the holding companies (Pargesa and GBL). The analysis also draws a distinction between the operating and non-operating items in the income, the non-operating part being composed of capital gains and losses in connection with disposals and any restructuring costs and impairment. According to this approach, the economic results for the first half of 2010 can be analysed as follows:

[IN MILLIONS OF SWISS FRANCS] FIRST HALF FIRST HALF FULL YEAR [UNAUDITED] 2010 2009 2009

Operating contribution of the main shareholdings Consolidated [Imerys] or equity-accounted [Lafarge]: Imerys share of operating income 72.9 30.5 75.8 Lafarge share of operating income 36.7 54.0 137.3 Non-consolidated: GDF Suez net dividend 58.6 128.1 201.9 Suez Environnement net dividend 17.0 17.8 17.8 Total net dividend 76.0 77.9 157.4 Pernod Ricard net dividend 11.8 8.9 8.9

Operating contribution of the main shareholdings 273.0 317.2 599.1 per share [SF] 3.23 3.75 7.08 Operating contribution of other shareholdings 9.1 (1.5) 1.4 Operating income contributed by holding companies (61.8) (73.2) (88.4)

Operating income 220.3 242.5 512.1 per share [SF] 2.60 2.87 6.05 Non-operating income from consolidated or equity-accounted companies 23.4 (15.7) (65.0) Non-operating income contributed by holding companies (15.2) (179.4) 344.6

Net income 228.5 47.4 791.7 per share [SF] 2.70 0.56 9.35 Average number of shares in circulation [thousands] 84,638 84,638 84,638 €/SF average exchange rate 1.437 1.506 1.510

CONSOLIDATED OR EQUITY-ACCOUNTED HOLDINGS Imerys recorded a 161% increase in net operating income to €122 million. Pargesa’s share of the Imerys operating contribution, expressed in Swiss francs, increased by 139% to SF72.9 million. Lafarge recorded a net income of €393 million, including non-recurring net items of €160 million. Pargesa’s share of the net operating income of Lafarge, expressed in Swiss francs, dropped 32% to SF36.7 million.

D 2 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


PAR

GESA

HO

LDIN

G SA

NON-CONSOLIDATED HOLDINGS The contributions of GDF Suez, Suez Environnement, Total and Pernod Ricard represent Pargesa’s share of the net dividends received by GBL from these companies. In the second quarter of 2010, GDF Suez paid its final 2009 dividend of €0.67 per share, up 12%, representing a contribution of SF58.6 million. An interim dividend for 2010 should be paid in the fourth quarter of 2010. The decrease of the GDF Suez contribution during the first half of 2010 is due to the fact that GDF Suez also distributed an exceptional dividend of €0.80 per share in the first half of 2009, representing a Pargesa share of SF73.2 million. Suez Environnement paid its annual dividend of €0.65 per share, unchanged, in the second quarter of 2010, representing a Pargesa share of SF17.0 million. Total, which announced an annual unit dividend of €2.28 per share, unchanged, paid the balance of the 2009 dividend in the second quarter of 2010, i.e., €1.14 per share, representing a contribution to Pargesa of SF76.0 million. Under its distribution policy, Total should distribute an interim dividend for 2010 in the second half of 2010. Pernod Ricard distributed an interim dividend of €0.61 per share, up 22%, in the second quarter of 2010, representing a Pargesa share of SF11.8 million. The increase of this contribution is also due to the acquisition of additional Pernod Ricard shares by the group (a shareholding of 9.8% at June 30, 2010 as against 8.8% at June 30, 2009). The net OPERATING CONTRIBUTION OF OTHER SHAREHOLDINGS includes the contribution of Ergon Capital Partners, owned by GBL, and the balance of the Iberdrola dividend received by GBL. OPERATING INCOME CONTRIBUTED BY HOLDING COMPANIES, which is the net sum of financial income and expenses, overheads and taxes, stands at -SF61.8 million, compared with -SF73.2 million for the first half of 2009. NON-OPERATING INCOME: the non-operating income from consolidated or equity-accounted companies mainly comprises Pargesa’s share of the non-operating income of Lafarge. The net non-operating income contributed by holding companies of -SF15.2 million at June 30, 2010 represents the charge recorded from the adjustment of the value of the Iberdrola shares held by GBL to their market price at June 30, 2010, whereas the previous period recorded a charge of -SF183 million related to Pernod Ricard and Iberdrola. The decrease of the Lafarge share price at June 30, 2010 required an impairment test to be conducted, which concluded that no impairment was necessary at June 30, 2010 on the consolidated value (€69.0 per share) of this associate.

PRESENTATION OF RESULTS IN ACCORDANCE WITH IFRS The simplified presentation of the income statement in accordance with IFRS is as follows:

[IN MILLIONS OF SWISS FRANCS] FIRST HALF FIRST HALF [UNAUDITED] 2010 2009

Operating income 2,404.6 2,108.7 Operating expenses (2,151.0) (2,053.2) Other income and expenses (32.7) (370.0)

Operating income 220.9 (314.5) Dividends and interest from long-term investments 326.1 457.4 Other financial income (expenses) (92.0) (117.4) Taxes (72.7) (9.9) Income from associates 129.1 109.6

Consolidated net profit (including minorities) 511.4 125.2 Attributable to minority interests 282.9 77.8 Attributable to Pargesa shareholders (group share) 228.5 47.4

Average number of shares in circulation [thousands] 84,638 84,638 Basic earnings per share, group share [SF] 2.70 0.56

P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0 D 3


PAR

GES

A H

OLD

ING

SA

Operating income and expenses are principally the turnover and operating expenses of Imerys, whose accounts are 100% integrated into those of Pargesa. Other income and expenses are the net capital gains and losses and impairment on group shareholdings and operations. The dividends and interest from long-term investments item comprises the net dividends received by the group from its non-consolidated holdings, mainly those from GDF Suez, Suez Environnement, Total and Pernod Ricard. The other financial income (expenses) and taxes items consolidate the figures for Pargesa, GBL and Imerys. Income from associates represents the share in the consolidated net profit contributed by shareholdings accounted for in the Pargesa financial statements using the equity method. It includes in particular the Lafarge contribution. Minority interests essentially relates to the share of results due to the minority shareholders of GBL and Imerys, these two companies being 100% integrated into the Pargesa group accounts.

ADJUSTED NET ASSET VALUE Pargesa’s flow-through adjusted net asset value, calculated on the basis of current market prices and exchange rates for the listed shareholdings, and on the basis of the share of consolidated shareholders’ equity and current exchange rates for unlisted investments, was SF98.4 per share at July 23, 2010. PARGESA FLOW-THROUGH ADJUSTED NET ASSET VALUE AT JULY 23, 2010 [IN MILLIONS OF SWISS FRANCS]

%CAPITAL

%ECONOMIC

INTEREST

SHARE PRICE IN LOCAL

CURRENCY (€)

FLOW- THROUGH

VALUE

WEIGHTINGAS % OF

TOTAL

Total 4.0 2.0 38.1 2,414 29 GDF Suez 5.2 2.6 25.3 1,998 24 Lafarge 21.1 10.6 43.1 1,752 21 Imerys 56.3 40.9 45.2 1,884 23 Pernod Ricard 9.8 4.9 62.6 1,093 13 Suez Environnement 7.1 3.6 14.5 341 4 Iberdrola 0.6 0.3 5.3 112 1 Other shareholdings 200 3 Total portfolio 9,794 118 Net cash (debt) (1,465) (18)Adjusted net asset value 8,329 100 per Pargesa share SF71.0 98.4 €/SF exchange rate 1.348

D 4 P O W E R F I N A N C I A L C O R P O R AT I O N — S E C O N D Q UA RT E R R E P O RT 2 0 1 0


This document is also available on www.sedar.com or on the corporation’s Web site, www.powerfinancial.com

additional printed copies of this document are available from the Secretary, Power Financial corporation 751 Victoria Square, Montréal, Québec, canada H2Y 2J3

or

Suite 2600, Richardson Building, 1 Lombard Place, Winnipeg, Manitoba, canada R3B 0X5

ce document est aussi disponible sur le site www.sedar.com ou sur le site Web de la Société, www.powerfinancial.com

Si vous préférez recevoir ce document en français, veuillez vous adresser au secrétaire, corporation Financière Power 751, square Victoria, Montréal (Québec) canada H2Y 2J3

ou

Bureau 2600, Richardson Building, 1 Lombard Place, Winnipeg (Manitoba) canada R3B 0X5

Corporate InformatIon

STock LISTINgS

Shares of Power Financial corporation are listed on the Toronto Stock Exchange,

under the following listings:

coMMoN SHaRES: PWF

FIRST PREFERRED SHaRES:

Series a: PWF.PR.a

Series c: PWF.PR.D

Series D: PWF.PR.E

Series E: PWF.PR.F

Series F: PWF.PR.g

Series H: PWF.PR.H

Series I: PWF.PR.I

Series J: PWF.PR.J

Series k: PWF.PR.k

Series L: PWF.PR.L

Series M: PWF.PR.M

Series o: PWF.PR.o

Series P: PWF.PR.P

TRaNSFER agENT aND REgISTRaR


offices in:

Montreal (Qc); Toronto (oN); Winnipeg (MB)


SHaREHoLDER SERVIcES

Shareholders with questions relating to the payment of dividends, change of address

and share certificates should contact the Transfer agent:


Shareholder Services

100 university avenue, 9th Floor

Toronto, ontario M5J 2Y1

Telephone: 1-800-564-6253 (toll-free in canada and the u.S.) or 514-982-7555


WEB SITE


PR

INT

ED

IN

ca

Na

Da

751 Victoria Square

Montréal, Québec, canada H2Y 2J3

514-286-7430


2second Quarter report

FoR THE PERIoD ENDED JuNE 30, 2010

Documents

second Quarter report - Power Financial€¦ · IGM FINANCIAL INC. PARGESA HOLDING SA POWER FINANCIAL CORPORATION ... The trademarks contained in this report are owned by Power Financial